Which Type of Mortgage Loan is Best for You

which type of mortgage loan program is best

If you are shopping mortgage lenders, you may have noticed several different types of mortgage programs out there.

So which type of home loan is right for you?

Well, it depends. Each person’s situation is unique.

We’re going to break down each type of mortgage program available, so you have a better idea of which one may be best for you.

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The Different Types of Mortgage Loans Available

  • FHA loans
  • VA loans
  • USDA loans
  • 203k loans
  • Conventional loans
  • Jumbo loans

Best Home Loan Program for Buyers with Poor Credit

FHA Loan

The best mortgage for people: with a credit score below 620, Less than 5% down payment, Lower income.

The Federal Housing Administration was created by the U.S. Government to encourage homeownership for people who didn’t have perfect credit or a large down payment. FHA loans are very popular today because of their low credit score requirements and low down payment needed. If you have a credit score below 620, an FHA loan will be your best option to get approved for a home loan.

Mortgage Program for Veterans

VA Loan

The best mortgage for Veterans.

If you’re an eligible Veteran, then there is no question a VA loan is the best type of mortgage. VA loans have a wealth of benefits, including no down payment, no mortgage insurance, and low closing costs. This is the cheapest loan type available. To qualify, you must have a VA certificate of eligibility. You will need a 620 credit score to qualify for a VA loan; if your score is under 620, you should improve your credit score or look into an FHA loan.

VA Loan Benefits

  • 100% Financing
  • Mortgage insurance no required
  • Low mortgage rates
  • Higher DTI ratios
  • Low closing costs
  • Easier to qualify for than traditional loans

Mortgage Program for Buyers in Rural Areas

USDA Loans

The best mortgage for people: In a USDA approved area and at least a 640 credit score.

The U.S. Department of Agriculture created the USDA housing program for rural development. USDA loans, like VA loans, offer 100% financing, so you do not need any down payment. Another great benefit of USDA loans is low mortgage insurance premiums. While FHA MIP is 0.85% of the loan amount, USDA MIP is just 0.35%.

When you think rural, you probably think of the country and farmers. The USDA eligibility map shows that USDA loans are available in most parts of the country outside of major cities. Because they are 100% financing lenders, have more stringent requirements. You will need at least a 640 credit score to qualify. If your score is below 640, you should consider an FHA loan or work on increasing your credit score.

Mortgage Program for People Who Want to Get Extra Money for Repairs

203k Loans

The best mortgage for people: Buying a home in need of repair and a 640+ credit score

203k loans are a type of home renovation loan. These loans allow you to buy a home in need of repair or renovations. You will get 2 loans, one for the property and a second loan for the repairs. A 203k mortgage will provide up to $35,000 for repairs and renovations. The mortgage qualifications cations are the same as FHA loans; however, you will need a minimum 620 credit score.

Mortgage Program for People with Good Credit and a Large Down Payment

Conventional Loan

The best mortgage for people: With 20% down and a credit score above 640.

Conventional loans are best suited for people with good credit and a 20% down payment. The great thing about conventional loans is that they do not require PMI (mortgage insurance) if you put 20% down. Even if you do not have a 20% down payment, PMI will be removed once your LTV reaches 78%. If you put 10% or more down with an FHA loan, you have to pay MIP for 13 years.

Conventional loans also have higher maximum loan amounts. While FHA loans typically max out around $271,050, conventional loans are available up to $424,100 in most areas.

Mortgage Program for Buyers with Good Credit and a Small Down Payment

Conventional 97 Loan

The best mortgage for people: With good credit and a low down payment

The conventional 97 loan is basically just like a traditional conventional loan. However, instead of needing a large down payment of 5%-20%, conventional 97 loans require just a 3% down payment. That lower than even FHA loans require. You will need a 640 credit score or higher. PMI is still required with down payments of less than 20%. However, PMI is dropped after the LTV reaches 78%.

15 year vs. 30 year fixed rate vs. adjustable rate mortgage terms

You have several options for the term of the mortgage you want. Fixed-rate, or an adjustable-rate mortgage.

  • Fixed-rate mortgage loans are the most common type of mortgage terms available. With a fixed-rate term, your interest rate and monthly mortgage payment will remain the same throughout the loan’s life. Fixed rates are great because you know what expect; your payment or interest rate will never increase.
  • Adjustable-rate mortgage loans start with a low initial interest rate, adjusting to a larger interest rate year after year.

15 year fixed rate mortgage

The best term for people: With high consistent income and a large amount of reserves

With a 15 year fixed-rate mortgage, you will get a rate that is about 1% lower than a 30-year mortgage. While you will be paying less interest, the total monthly mortgage payment will be higher than a 30-year term.

A 15-year term is best for people who have a high income that is fairly consistent and with a good amount of savings. The problem with 15-year terms is the higher monthly payment. If you struggle financially for any reason, you may not be able to pay the higher payment.

30 year fixed rate mortgage

The best term for people: Wanting the lowest mortgage payment possible

If you’re low on savings and your income fluctuates, then the lower monthly payment of a 30-year mortgage is the best option. Even if you want to pay off your loan early, you can. Just make occasional payments toward the principal balance.

5-1 Adjustable-rate mortgage

The best term for people: Who plan on staying in the home for less than 5 years or plan on paying off the mortgage within 5 years.

If you’re certain you will be staying in the property for less than 5 years, then a 5/1 ARM is a great way to save money. The initial rate for the first 5 years is often very low; after 5 years, the rate balloons to a much higher rate every year after that. However, if you’re unsure how long you’ll stay in the home, a fixed rate is probably a better option. Comparing 5-1 ARM vs. fixed rate.

How to choose the right type of mortgage for you?

Choosing the right type of home loan program is not always as easy as it seems. If you have a credit score below 620, then FHA is your best bet to get approved for a home loan. However, if your score is 620 or higher, you have many more choices available.

Finding the best home loan is very important. Finding the best online mortgage lender is just as important. An experienced loan officer can help you navigate through all the mortgage programs to find the right fit for you.

Speak to lenders and compare mortgage rates