This article is about the different types of mortgage loans currently on the market. Each is designed to fit different purchasing scenarios. As such, a prospective homebuyer needs to be familiar with the different types of mortgages offered for the prospective property in your new neighborhood.

Moreover, applying for a home loan is a daunting and complicated process. We intend to help direct you towards the type of mortgage that best suits your needs, in combination with the kind of home that you can presently afford. Here at Rising Sun Lending, our mission is to help home buyers with the mortgage loan process as simple as possible.

Choosing the right mortgage loan is very important.  A homeowner is more likely to stay with their repayment if they choose a home and a mortgage that they can afford. There are different kinds of mortgages, and an understanding of the different types of them will guide you to choose the most suitable one.

Again, we are going to summarize five different types of mortgage loans for the potential home buyer:

• Conventional Mortgages

• Government-insured Mortgages

• Fixed-rate Mortgages

• Adjustable-rate Mortgages (ARM)

• Jumbo Mortgages

First, all types of mortgages are considered either Conforming or Non-conforming loans. Conforming versus nonconforming loans are determined by whether your lender keeps the loan and collects payments and interest or sells it to one of two real estate investment companies – Fannie Mae or Freddie Mac.

For the purposes of this article, we break the five different types of mortgages into conforming and non-conforming loan classifications.

CONFORMING LOANS

A conforming loan refers to a conventional mortgage purchased through Fannie Mae or Freddie Mac. For one of these institutions to buy the mortgage from your lender, the loan must meet basic qualifications set by the Federal Housing Finance Agency (FHFA). 

Conforming Loans include Conventional Mortgages, Fixed-rate Mortgages, and Adjustable-rate Mortgages.

1) Conventional Mortgages

Conventional mortgages are the most common type of mortgage. That said, conventional loans do have stricter regulations on your credit score and your debt-to-income (DTI) ratio. You can buy a home with as little as 3% down on a conventional mortgage. You’ll also need a minimum credit score of at least 620 to qualify for a traditional loan. You can skip buying private mortgage insurance (PMI) if you have at least a 20% down payment. However, a down payment of less than 20% means you’ll need to pay for PMI. Mortgage insurance rates are usually lower for conventional loans than other types of loans (like FHA loans).

Conventional loans are a good choice for most borrowers who want to take advantage of lower interest rates with a larger down payment. If you can’t provide at least 3% down and you’re eligible, you could consider a USDA loan or a VA loan.

2) Fixed-rate Mortgages

Homebuyers pay off the mortgage over a fixed period at a fixed principal and interest rate. The amount you pay per month may fluctuate due to changes in property tax and insurance rates, but for the most part, fixed-rate mortgages offer you a very predictable monthly payment. Homebuyers can choose from loans paid over 10, 15, 20, 30, or even 50 years.

3) Adjustable-rate Mortgages (ARM)

Unlike the stability of fixed-rate loans, adjustable-rate mortgages have fluctuating interest rates that can go up or down with market conditions. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. Look for an ARM that caps how much your interest or monthly mortgage rate can increase, so you don’t wind up in financial trouble when the loan resets.

NON-CONFORMING LOANS

If your loan doesn’t meet conforming standards, it’s considered a non-conforming loan. Nonconforming loans have less strict guidelines than conforming loans. These loans can allow you to borrow with a lower credit score, take out a larger loan, or get a loan with no money down. You may even be able to get a non-conforming loan if you have a negative item on your credit report, like a bankruptcy.

Non-conforming Loans include Government-insured Mortgages (FHA Loans, USDA Loans, ad VA Loans) and Jumbo Mortgages.

4) Government-insured Mortgages

The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners. Three government agencies back mortgages: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans), and the U.S. Department of Veterans Affairs (VA loans).

       FHA Loans

Backed by the FHA, these types of home loans make homeownership possible for borrowers who don’t have a large down payment saved up or don’t have pristine credit. Borrowers need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment; however, a score of 500 is accepted if you put at least 10 percent down. FHA loans require two mortgage insurance premiums: one is paid upfront, and the other is paid annually for the life of the loan if you put less than 10 percent down, which can increase the overall cost of your mortgage. Lastly, with an FHA loan, the home seller can contribute to closing costs.

       USDA Loans

USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes.

       VA Loans

Loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. VA loans do not require a down payment or mortgage insurance, and closing costs are generally capped and may be paid by the seller. A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program’s cost to taxpayers. This fee and other closing costs can be rolled into most VA loans or paid upfront at closing.

5) Jumbo Mortgages

Jumbo mortgages are conventional types of mortgages that have non-conforming loan limits. This means the home price exceeds federal loan limits. For 2021, the maximum conforming loan limit for single-family homes in most of the U.S. is $548,250. In certain high-cost areas, the ceiling is $822,375. Jumbo loans are more common in higher-cost areas and require more in-depth documentation to qualify.

That said, Jumbo loan interest rates are usually similar to conforming interest rates, but they’re more challenging to qualify for than other types of loans. You’ll need to have a higher credit score and a lower DTI to be eligible for jumbo loans.

In Rising Sun Lending, our professional team has over 20 years of experience in mortgage loans. We provide purchase and refinance services for conventional, VA, and FHA loans. Our services include (but are not limited to): Provide market interest rates for mortgage loans, provide multiple loan plans for consideration, and provide periodic follow-up after initial loan settlement when lower rates are available.