What to know about the 12 types of mortgage loans you can get to buy a home
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Depending on how much you need to borrow, you may choose between a conforming and jumbo mortgage.
If your finances aren’t strong enough for a conforming or jumbo mortgage, you may still be eligible for an FHA, VA, or USDA mortgage.
You’ll need to choose between a fixed-rate mortgage, which locks in your interest rate for the entire life of your mortgage, and an adjustable-rate mortgage, which changes your rate periodically.
You may be interested in a specialized type of mortgage, such as a construction loan or interest-only mortgage.
A conforming loan meets the borrowing limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets the limit for conforming loans every year, and in 2021, the limit is $548,250 in most parts of the US. In areas with a higher cost of living, such as Alaska, Hawaii, Guam, and the US Virgin Islands, the limit has been bumped up to $822,375.
You’ll pay for private mortgage insurance on a conforming mortgage if you have less than 20% for a down payment. PMI typically costs between 0.2% and 2% of your mortgage amount. You can cancel PMI once you’ve attained more equity in your home.
A jumbo mortgage, also known as a nonconforming mortgage, is another type of conventional loan. You’ll need a jumbo mortgage to borrow more than the FHFA borrowing limit.
As discussed above, in 2021, the limit is $548,250 in most parts of the US. In areas with a higher cost of living, such as Alaska, Hawaii, Guam, and the US Virgin Islands, the limit has been increased to $822,375. A jumbo mortgage is for an amount higher than these limits.
Eligibility requirements for jumbo mortgages are a bit stricter than for conforming mortgages, because lenders are taking a greater risk by lending you more money. Each lender has its own requirements for nonconforming mortgage, but you’ll likely need a higher credit score, lower debt-to-income ratio, and bigger down payment than you would for a conforming mortgage.
There are three types of government mortgages, or home loans backed by federal agencies: FHA, VA, and USDA. If you default on your mortgage payments, the agency compensates the lender. This makes the loans less risky for your lender, and therefore more accessible for you.
An FHA mortgage is a government mortgage backed by the Federal Housing Administration. You can get an FHA mortgage with a 3.5% down payment if your credit score is 580 or higher, or with 10% down if your score is 500 to 579. Most lenders require a debt-to-income ratio of 43% or lower.
You don’t have to pay for PMI with an FHA mortgage, but you do have to pay for a different type of mortgage insurance. It will cost you 1.75% of your mortgage at closing. Then you’ll pay an annual premium of 0.45% to 1.05% of your mortgage.
A VA mortgage is a government mortgage backed by the US Department of Veterans Affairs, and it’s for military families only. VA mortgages typically come with lower interest rates than conforming mortgages, and you don’t need a down payment.
You will need at least a 660 credit score and 41% debt-to-income ratio to qualify for a VA mortgage.
You won’t have to pay for mortgage insurance, but you will pay a funding fee. The fee is 2.3% of the amount borrowed if this is your first VA loan, or 3.6% if you’ve used a VA loan before. The fee will be lower if you have money for a down payment, though.
A USDA mortgage is a government mortgage backed by the US Department of Agriculture. It’s for low-to-middle-income families buying a home in a rural or suburban area. The qualifying income limit depends on where you live in the US. The population restrictions are 20,000 for some counties and 35,000 for others.
Like a VA mortgage, a USDA mortgage comes with lower interest rates and doesn’t require a down payment. Most lenders require a 640 credit score and 41% debt-to-income ratio.
You will have to pay for mortgage insurance, but it should cost less than what you might pay for PMI or for insurance on an FHA mortgage. You’ll pay 1% of your principal at closing, then an annual premium of 0.35% of your remaining principal.
Depending on which type of mortgage you get, you may get to pick between the two types or be limited to just one. For example, you can select either a fixed or adjustable rate for a conforming mortgage, but you can only get a fixed rate on a USDA mortgage.
A fixed-rate mortgage locks in your rate for the duration of your loan. Although US mortgage rates will increase or decrease over the years, you’ll still pay the same interest rate in 30 years as you did on your very first mortgage payment.
Because rates are at historic lows right now, a fixed-rate mortgage is generally a good deal. You can lock in a low rate for the entire life of your loan instead of risking an increase later.
An adjustable-rate mortgage, commonly referred to as an ARM, keeps your rate the same for the first few years, then periodically changes over time — typically once a year. For example, if you have a 5/1 ARM, your introductory rate period is five years, and your rate will go up or down every year.
An ARM isn’t the best deal right now. With rates at all-time lows, there’s a good chance your rate will increase at some point before you pay off your mortgage. It’s safer to lock in your low rate with a fixed mortgage.
You might need a construction loan if you build a house and need financing to cover permits, supplies, and labor.
Construction loans are short-term loans (usually for one year) that carry higher interest rates than regular mortgages. You may choose to pay off your loan once construction is completed, or roll it into a regular mortgage.
If you want to buy a home and make significant changes to it, you can apply for a renovation loan. The money you borrow for renovations will be rolled into your mortgage.
With a balloon mortgage, you’ll make monthly payments as you would for any other type of mortgage for the first five years or so. At the end of that initial payment period, you’ll pay off the total amount you still owe in one lump sum.
Balloon mortgages come with low interest rates, but they’re risky. You might like a balloon mortgage if you expect to move out of your home or refinance before the initial payment period ends. This way, you’ll benefit from the low rate without paying a ton of money all at once later.
You also may prefer a balloon mortgage if you expect to receive a lot of money in the time between getting the mortgage and paying off the total amount. But this mindset can be dangerous, especially if the money you were expecting doesn’t come through,
Balloon mortgages are risky for both the buyer and lender, so finding a lender that offers one may be difficult.
With an interest-only mortgage, you borrow money as you would with any other type of mortgage, and you make monthly payments. But you only pay off the interest charged by the lender, not the principal (the amount of money you borrow).
Interest-only mortgage terms are typically 10 years or less. When the term ends, you can refinance into another interest-only mortgage or into a regular mortgage that requires you to pay down the principal.
Some people like this type of mortgage for the low monthly payments. But interest-only mortgages typically have adjustable interest rates, so your rate will fluctuate from year to year. You also won’t build equity in your home, because you won’t be paying down the principal.
Each lender sets its own eligibility requirements for interest-only mortgages, but you’ll likely need a higher credit score, lower debt-to-income ratio, and bigger down payment than you would for a conforming mortgage.
A reverse mortgage is a type of home loan for people age 62 or older. Unlike most of the other mortgages on our list, a reverse mortgage isn’t the first mortgage you’ll take out on your home. It’s for people who have gained equity in their home since originally buying it, and likely have paid off their mortgage already.
A forward mortgage — which you probably think of as a regular mortgage — is a type of loan you’d use to buy a home. You make monthly payments to the lender until the home is paid off, and over time, your debt decreases.
A reverse mortgage, on the other hand, is used after you’ve already bought the home. The lender pays you, and the money comes out of the equity you’ve acquired in the house. Over time, your debt increases.
When you eventually sell the home (whether you’re living or dead), the proceeds go to the lender to pay off your debt from the reverse mortgage. Any additional money from the sale will go to you if you’re living, or to your estate if you’re dead.
If your heirs want to keep the property, then they can pay off the reverse mortgage themselves.
When you refinance your home, you replace your initial mortgage with a new one. There are multiple potential benefits to refinancing: locking in a lower interest rate, making lower monthly payments, or canceling private mortgage insurance are just a few.
Because you’re just applying for a new mortgage, much of the process will be the same as it was the first time around. The lender will still look at your credit score and debt-to-income ratio. But instead of determining your interest rate by looking at your down payment, the lender will consider how much equity you’ve accumulated in your home.