What are the Different Types of Home Loans?

types of home loans

If you’re planning on buying a home this year, you’re probably aware there are many different types of home loans available to you.

But how do you decide which type of mortgage loan should you choose?

We will go over all the mortgage programs available and discuss the pros and cons of each.

By the end of this article, you should have all the information you need to decide which kind of mortgage fits your needs the best.

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Low Down Payment Home Loans

Conventional loans used to be the only type of mortgage that was available to homebuyers. They required a large down payment and excellent credit which made them unattainable for many homebuyers.

Today the government backs many different kinds of low, and no down payment mortgage programs.

FHA Loans

2020 FHA Loan Requirements

• 580 credit score with 3.5% down

 500-579 score with 10% down

 Maximum 50% debt-to-income ratio

• Two years of stable employment and income history

 For primary residence only

 24 month waiting period after a foreclosure or bankruptcy

1% of student loan debt added to DTI ratio

FHA home loans are one of the most popular types of mortgage loans used by first-time homebuyers. They have the lowest credit score requirements of any mortgage type.

FHA loans are guaranteed by the Federal Housing Administration. You will still work with a private lender that is approved to issue FHA loans. To fund the program FHA includes a mortgage insurance premium (MIP) to your monthly mortgage payment.

If you have a 500 FICO score, you can qualify for an FHA mortgage with a 10% down payment. Borrowers with a 580 or higher FICO score may be eligible for an FHA loan with just 3.5% down.

FHA loan credit requirements

Because of the low credit and down payment requirements, they are loved by first time home buyers. First-time buyers have lower credit scores and less savings on average, making FHA loans an excellent option. Another great benefit of FHA home loans is that the down payment can be a gift from a family member or friend.

There are also first-time homebuyer down payment assistance and grants you may be eligible for. You can check the HUD website to see programs in your state.

One of the only downsides of FHA loans is the mortgage insurance premium (MIP). The FHA MIP fee typically 0.85% of the loan amount annually. Check out our FHA MIP Chart.

Speak to FHA Lenders and See if You Qualify

VA Loans

12 Benefits of VA Loans

• No down payment

• No mortgage insurance premium (MIP)

• Low credit scores may be approved

• Flexible borrower requirements

• Low interest rates

• Lower closing costs

• Up to 50% debt-to-income ratio

• VA negotiates with the lender if you are facing foreclosure

• No loan limits

• The seller can pay 6% of closing costs

• Lower monthly payment than other loan types

• No Prepayment Penalty

If you’re a Veteran, then you may qualify for a VA home loan. VA loans offer a wealth of benefits to those who are eligible, including zero down payment.

On top of getting 100% financing, VA loans don’t require mortgage insurance. No PMI means huge savings; the average homeowner saves about $2,000 per year on mortgage insurance.

USDA Loans

2020 USDA Loan Requirements

• 640 minimum credit score

• Total household income less than 115% of the average in your area

• Maximum 43%-50% debt-to-income ratio

• Two years of stable employment history

• Occupy the property as your primary residence

• Prove of income (Two years of tax returns and W2's)

• Must be in an eligible rural area

• Work with an approved USDA lender

The U.S. Department of Agriculture doesn’t just offer food and nutrition services. They now provide mortgages in rural areas of the country. USDA / RHS loans offer a no down payment mortgage and have low mortgage insurance fees.

When you think of the word, rural, farms, and ranches are probably one of the first things that come to mind. However, the USDA eligibility map shows that over 95% of the U.S. is eligible.

USDA home loans require a 640 credit score or higher to qualify.

FHA 203k Loans

2020 FHA 203k Loan Requirements

Minimum 620 credit score

24 month waiting period after a bankruptcy or foreclosure

 Maximum 43%-50% debt-to-income ratio

• For primary residence only

FHA 203k loans are a type of home renovation loan that funds the purchase of a home and pays for repairs or renovations on the property.

FHA loans require the property to be in livable condition, not in need of repairs. With a 203k loan, you can buy a “fixer-upper” home in need of repairs and get the cash to make those repairs.

203k home loans have the same loan requirements as the FHA does. They require a 3.5% down payment. However, the credit requirements for 203k loans are higher than FHA. Most lenders want you to have at least a 640 credit score.

HomeReady and Home Possible Loans

Home Possible / HomeReady Loan Benefits

 3% down payment

 Up to 50% DTI ratio 

• Alternate income sources accepted

• Fixed mortgage payments

• Low mortgage insurance premiums

 PMI not required once LTV ratio reaches 78%

Fannie Mae and Freddie Mac are two largest buyers of conventional mortgage loans in the US. Conventional loans are the most common type of home loan used today, but they have fairly high down payment requirements making them unattainable for many first-time buyers.

Fannie Mae and Freddie Mac created the HomeReady and Home Possible Loan Programs to compete with FHA loans. While they require a higher credit score of 620, but you will only need to have a 3% down payment.

Conventional Loans

Conventional mortgage loans adhere to the guidelines of Fannie Mae and Freddie Mac, which is why they’re called conforming loans.. They are offered by private lenders and are insured by private mortgage companies not the government.

They require private mortgage insurance (PMI) with a loan-to-value ratio above 80%. However, the PMI fee is usually lower than FHA loans, around 0.50% in most cases.

Conventional loan requirements are more stringent than government loans. They require a minimum credit score pf 620 and a down payment between 5% – 20%.

One of the benefits of conventional loans is that mortgage insurance is not required if at least 20% is put down. PMI cancels once the LTV reaches 78%.

2020 Conventional Loan Requirements

• Minimum 620 credit score

• 3% - 20% down payment

• 36-48 month waiting period after a bankruptcy or foreclosure

• Maximum 43% debt-to-income ratio

• Two years of stable employment history

• Proof of income (W2's, tax returns)

Non-Conforming Home Loans

A non-conforming loan is a loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. The conforming loan limit is $510,400 in most areas of the U.S. and goes up to $765,600 in certain high-cost areas of the country.

Jumbo Loans

If you need a loan that exceeds the conventional loan limit in your area, you will need to get a jumbo loan. Jumbo loans are more challenging to qualify for than traditional loans because of the higher loan amount.

Most lenders will want you to have at least a 680-700 credit score. Jumbo loans also require a higher down payment, usually between 15%-20% is the minimum down payment required.

Super Jumbo Loans

Jumbo loans offer loan amounts up to around 1 million dollars. If you’re buying a home and need a loan for over 1 million, you will most likely need what’s called a “super jumbo loan.”

A super jumbo loan can provide up to 3 million dollars to purchase your home. These mortgages are even more difficult to qualify for a require excellent credit.

Fixed-Rate vs. Adjustable-Rate Mortgage (ARM)

Most every type of home loan program will offer the option of a fixed-rate or an adjustable-rate mortgage. A fixed-rate mortgage will have the same interest rate for the life of the loan.

An adjustable-rate loan also called an ARM, would have an initial low-interest rate, usually for five years, increase annually.

30 Year Fixed-Rate – The 30-year fixed-rate mortgage is the most common term homeowners select. It will have the lowest monthly payment, and your rate will never increase.

15 Year Fixed-Rate – A 15-year rate will have a higher monthly payment, but more of your payment will go towards the principal balance. You will pay off your loan in half the time and save a ton in interest. 15-year mortgages also have a lower rate than 30-year loans; your mortgage rate could be as much as 1% lower with a 15 yr mortgage.

5/1 ARM – An adjustable-rate mortgage will have a low initial rate for the first five years of the loan. After five years, the interest rate will increase on an annual basis. An ARM mortgage is best suited for buyers who plan on staying in the home for less than five years, or who plan on paying off the loan in 5 years or less.

Types of Refinance Loans

Rate and Term Refinance

This is a traditional refinance of a conventional loan or an FHA loan into a conventional. This type of refinance loan will lower your interest rate and monthly payment.

Many people who have an FHA loan will choose to refinance into a conventional loan to drop mortgage insurance.

Home Affordable Refinance Program (HARP)

The Obama Administration created the HARP program to help homeowners whose property values plummeted because of the housing market crash. With HARP, you can refinance your home loan into a lower rate even if you’re underwater on your mortgage.

Editor’s note: The HARP program has been discontinued

Home Equity Loans and HELOC

Home equity loans and HELOC loans use the built-up equity in your home as collateral for a loan. These are also known as a second mortgage because you will have two separate payments. A home equity loan provides you with a lump sum of cash up to 80% of the market value of your home.

A HELOC works like a credit card, giving you a line of credit you can borrow from as you need it. You only pay interest on the amount borrowed.

Cash-Out Refinance

A cash-out refinance is where you refinance your mortgage and get cash out using the equity in your home. You will have just one monthly mortgage payment, and the rates are lower than they typically are with a home equity loan.

You can cash out up to 80% of the value of your home with a cash-out refi.

Streamline Refinance

Government home loans such as FHA, VA, and USDA also offer a refinance program. FHA streamline refinancing is a quick and easy way to refinance your FHA loan into a new lower rate.

The great thing about streamline refinances is that they do not require a credit check or income verification. The process is “streamlined” and requires much less paperwork than a traditional refinance.

In Conclusion

With so many types of home loans available, choosing the one that’s right for you can be overwhelming.

It’s a good idea to speak to an experienced loan officer who can go over all of your options.

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