Last Updated: March 10, 2023
When you’re in the market for a new home, one of the most important decisions you’ll make is choosing the right mortgage. Many types of mortgages are available, and it can be challenging to decide which one is right for you. This article addresses the most popular mortgages and helps you decide which one is best for you.
Types of Mortgages
Mortgages are loans that people use to buy homes. They allow a potential home buyer to pay for a preferred type of home over time, typically 30 years. The money you borrow with a mortgage is used to pay for the property you want to purchase. The interest rate on mortgages can widely vary, but they’re generally lower than other types of loans because they’re backed by an asset: a house.
The amount of money you can borrow with a mortgage depends on many factors, including your income and the value of the home you’re buying. You might, however, be wondering about the basic loan requirements. Mortgages are types of home loans you get from a bank or another financial institution. To get a mortgage, you must meet the basic loan requirements, including a good credit score and enough income to make your monthly mortgage payment. You also need to provide documentation proving that you can afford the monthly payments.
Conforming loans are mortgage types that meet the requirements set by Fannie Mae and Freddie Mac—two government-sponsored agencies that buy and sell mortgages. Conforming loans have interest rates and terms set by the market, but they must conform to certain size limits. Requirements for these types of loans include:
Maximum Dollar Limit
The maximum dollar amount for a conforming loan for 2022 is $647,200 in most areas of the country. That means that you can borrow up to around $647,000 from your bank or another lender when you wish to buy property without having to pay private mortgage insurance (PMI). Keep in mind that in such high-cost counties as Hawaii or Alaska, the maximum dollar amount is $970,800. Higher limits also apply if you acquire a multi-unit home.
The second requirement for these types of mortgages is not to be federally backed. This type of loan may not receive backing from a federal government agency. Fannie Mae and Freddie Mac may not purchase your government-backed mortgage if you have one with them. The Department of Veterans Affairs and the Federal Housing Administration provide (among other things) mortgage insurance.
Meets Lender-Specific Criteria
You need to meet lender-specific criteria when applying for this loan. To qualify for a conforming loan, you must have a good credit score of at least 620. When applying for such a loan, your debt-to-income (DTI) ratio must also be below 43%.
The most popular kinds of mortgages include:
Conventional mortgages are the most common type of mortgage. They have lower interest rates than government-sponsored mortgages but require more money down. To qualify for a conventional mortgage, you need a credit score of 620 or higher and a down payment of at least 20%. But you may secure a conventional mortgage with as little as 3% down.
Conventional loans are a good choice for most borrowers who wish to take advantage of lower interest rates with a larger down payment. If you can’t offer at least 3% down and you’re qualified, a USDA loan or VA loan might be an option.
A fixed-rate mortgage means that the interest rate doesn’t change for the entire term of the loan. Even if the monthly payment may vary due to property tax or insurance rates, you’ll still get a predictable monthly payment.
Fixed-rate mortgages are excellent if you plan on living in the house for at least six years. Typically used to buy property, these mortgage types have become very popular in recent years. If interest and taxes in your area are extremely high, you might not consider obtaining this type of loan. If you accept this loan under such conditions, you’ll be stuck with the same payment each month until you pay off the mortgage—meaning that your monthly payments will be sky-high until you pay off the mortgage or refinance
These loans are quite different types of mortgages compared to fixed-rate mortgages. An adjustable-rate mortgage is a mortgage that changes its interest rate periodically based on market conditions. Typically used to buy a home, this loan has also become very popular in recent years. If the interest rates are incredibly high, you might consider avoiding these types of house loans, but they do offer many benefits for those who qualify for them.
These types of loans, however, are 30-year loans. With an adjustable-rate mortgage, you first need to go through an introductory period that typically lasts five to 10 years. The good news, however, is that while you’re going through the initial period, you’ll pay a fixed interest rate for a short time, typically less than 30-year fixed rates.
|DID YOU KNOW? Anyone can own a house with home equity loans or home loans for bad credit.|
Are you wondering how to get a loan with a bad credit score? Do you have a negative credit report in your credit history, such as bankruptcy? Consider obtaining a non-conforming loan. These types of home mortgages do not meet the requirements set by Fannie Mae and Freddie Mac but may have better interest rates or terms than a conventional mortgage. If you opt for a mortgage but have a low credit score, high debt-to-income (DTI) ratio, or wish to buy a luxury home, then non-conforming loans might be the best option for you.
There are many mortgage loan types, each with its benefits and drawbacks. It’s essential to understand the various mortgages so you can choose the one that’s best for you. With research and help from a financial advisor, you can make the best decision for your family and financial future. Non-conforming loans include:
FHA loans are types of housing loans insured by the Federal Housing Administration loans (FHA). FHA loans have lower interest rates than conventional mortgages but don’t require as much money down. They’re also a good option for those who haven’t saved much money. To qualify for an FHA loan, you need a credit score of 580 or higher and a down payment of at least 20%.
USDA loans are mortgages guaranteed by the United States Department of Agriculture (USDA). To qualify for a USDA loan, you must be buying property in an eligible area, typically a rural area or small town. What makes USDA loans excellent mortgage options is that they have low-interest rates and don’t require a down payment.
Veterans’ loans are mortgages guaranteed by the US Department of Veterans Affairs (VA). They have low-interest rates and don’t require a down payment. If you’re a veteran or active-duty military member, you can qualify for a VA loan. And if you have served the country but are now a retired military officer and wish to become a homeowner, VA loans provide the opportunity to fulfill your dream.
Jumbo loans are mortgages larger than the limits set by Fannie Mae and Freddie Mac. Jumbo loans have higher interest rates than conventional or government-sponsored mortgages but can be a good option for those who need to borrow more money. If you’re considering buying a high-value property, these kinds of home loans should be your preferred type of house loan.
|DID YOU KNOW? If you’ve bought your dream house and have lived there for quite some time, there’s a possibility you’ll need some home improvements. Home improvement loans exist to make renovations more affordable for those who haven’t put aside funds for such purposes.|
|Conventional mortgages require a credit score of 620 or higher to apply for a loan.|
|Fixed-rate mortgages are excellent if you plan on living in the house for at least six years.|
|With an FHA mortgage, you can buy a house if you have a minimum credit score of 500.|
|VA loans are for service members and active duty or retired military members.|
A mortgage is a type of loan that people use when buying a house. They’re quite divergent, fitting the needs of anyone who wants to fulfill their dream of owning their own house one day. Our guide has aimed to explain in detail the most popular types of home mortgage loans and what you need to do to obtain one.
According to Fannie Mae guidelines, you can simultaneously have up to 10 mortgages but be prepared for complex challenges if you obtain 10 mortgages at once.
The most common credit score used for mortgages includes the FICO score, ranging from 300 to 850. Your credit score will be one of the factors that lenders consider when applying for a mortgage.
To get approved for two mortgages, you must have a good credit score and show adequate income and assets. You must also be sure that you’re not taking on too much debt at once.
There are many types of mortgages you can get as a first-time homebuyer. You may want to consider a conventional loan, but if you have low to moderate-income, you may want to look into government-backed loans, such as an FHA loan or VA loan.