Types of Home Loans
If you’re purchasing a new house, you’ll likely need a home loan. But with so many different kinds to choose from, it can feel overwhelming to decide which type of loan you need. From conventional loans to non-conventional loans and everything in between, each loan type has unique pros and cons.
Whether you’re buying your first house or your tenth, choosing the right home loan for you is important for your financial future.
Conventional Loans
Conventional loans are the most popular and widely used home loans. They are not federally insured, but they offer more flexible terms for interest, loan amount, and more. Homebuyers with good credit scores and financial stability often choose these products for the flexibility.
Additionally, these types of loans may be used to fund both the building and the financing of a property. One-close construction loans begin as a construction loan and then turn into a typical loan once the construction is complete, making them an attractive tool for borrowers who want their own custom property.
1. Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARM) are the most common type of conventional home loan. As the name suggests, they offer variable interest rates, meaning the interest payment of the loan may change intermittently based on something called a benchmark index. This makes monthly mortgage payments increase or decrease based on the fluctuations of the index.
When you first apply for an adjustable-rate mortgage, you’ll likely be offered a lower interest rate or “introductory rate,” making these loans attractive to many homebuyers. Even though the interest rate will change, the temporary fixed rate is ideal for buyers who plan to pay off, refinance, or sell their homes quickly.
ARMs also come with interest rate caps. This ensures your interest rate and payments will not increase beyond a certain amount throughout the life of your loan.
Pros:
Lower payments to start
Flexible terms
Payments and interest rate could decrease based on benchmark index
Cheaper than a fixed rate mortgage at the beginning
Potential to avoid private mortgage insurance (PMI)
Cons:
Interest rates and monthly payments can increase unexpectedly
Complex loan terms
Not federally insured
Borrowers must have high credit scores to qualify
2. Fixed-Rate Mortgages
Fixed-rate mortgages are loans that have the same interest rate over the life of the loan. In other words, your monthly principal and interest payments will not change once you secure your loan. Whether you have a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage, you’ll always know what your monthly payment will be, making a fixed-rate mortgage more stable and predictable than an ARM.
A fixed-rate loan is ideal for those who value predictability and stability. The terms of fixed-rate mortgages are often much simpler than with adjustable-rate mortgages (ARMs), making them feel a bit more accessible. However, fixed-interest rate mortgages typically offer higher interest rates than ARM introductory rates.
Pros:
Stable and predictable
Simpler terms
Cons:
Higher interest rates than ARM starting rates
Long-term commitment
Fewer loan-term options
Government-Backed Loans
Non-conventional loans are also known as government-backed loans, as they are insured by various government agencies.
Non-conventional loans can make buying and owning a home more accessible to homebuyers who may struggle to qualify for conventional loans. These loans are designed to assist first-time homebuyers, veterans, and those with moderate-to-lower incomes. Government-backed loans typically come with stricter terms and qualifiers, providing greater security to the mortgage lender.
There are three main types of government-backed loans. Depending on the loan, you might have access to lower monthly payments, flexible down payment requirements, or looser requirements regarding credit scores.
3. VA Loans
VA loans are some of the most common non-conventional loans available. These loans come from the US Department of Veterans Affairs (VA) and are designed to help veterans and active-duty military personnel, as well as surviving children and spouses, find housing.
Not everyone is eligible for a VA loan, but if you are, you may want to take advantage of the numerous benefits and features. For example, if you qualify for a VA loan, you won’t need to come up with a down payment to buy your home. However, you will need to pay a VA funding fee, which helps fund the program and ensure that other veterans can access mortgages.
VA loans also come with competitive interest rates and PMI waivers, and they have lower credit score requirements than other loan types. Choosing a VA loan is a great way to lower your monthly mortgage payment, drastically reduce closing costs, and make home-buying more accessible for you and your military family.
Pros:
Flexible credit score requirements
Zero down payment
Monthly payment assistance and foreclosure avoidance are available through the VA for some borrowers
Cons:
Can only be used for primary residences, not second homes or rental properties
Strict eligibility restrictions
Only available to military personnel, veterans, and their families
4. FHA Loans
The Federal Housing Administration (FHA) also offers home loans via the Federal Housing Finance Agency to those who are eligible. FHA loans are overseen by the US Department of Housing and Urban Development (HUD). These are government-backed loans, meaning that if the borrower defaults, the government will reimburse the lender for part of the loan. As such, lenders will be more willing to lend to people who would not qualify for a conventional loan.
Similar to a VA loan, an FHA loan is designed to make buying a home more accessible to US citizens, but they’re available to a wider demographic of borrowers. FHA loans are ideal for homebuyers with lower credit scores and limited funds for a down payment.
Getting approved for an FHA loan is generally easier than seeking approval for a conventional loan. They’re assumable (meaning they can be transferred from a seller to a buyer) and the down payment requirements are very low. However, they do require a UFMIP (upfront mortgage insurance premium) and PMI (private mortgage insurance), otherwise known as FHA mortgage insurance.
Federal Housing Administration loans also have a sliding scale for the down payment, meaning that if you have a credit score of 580 or better, you only need to provide 3.5% down. Those with credit scores between 500 and 579 will need to offer at least a 10% down payment to qualify.
Pros:
Flexible credit score requirements
Only 3.5% required for the down payment with good credit
Loans are transferable or assumable
Streamlined refinancing options
Cons:
Required monthly insurance premiums
Maximum loan amounts based on region and property type
It cannot be used for second homes, vacation homes, or investment properties
5. USDA Loans
USDA loans are backed by the United States Department of Agriculture (USDA) and are designed to help first-time homebuyers build, purchase, or renovate homes in rural and suburban areas. These loans tend to have favorable terms and affordable financing options.
These unconventional loans do not require down payments, and they offer low mortgage insurance premiums. However, borrowers must earn below a certain amount annually to qualify.
Pros:
No down payment required
Available to low-income borrowers
Affordable fixed interest rates
Lower mortgage insurance premiums
Cons:
Geographic and property-condition restrictions (not all properties are eligible)
It cannot be used for second homes, rentals, vacation homes, etc.
Longer underwriting process
LGBTQ+ and BIPOC individuals deserve to enjoy all the beauty that rural America has to offer; in fact, it’s estimated that 3 million LGBTQ Americans live in rural zones, while 24% of rural Americans are people of color. We can assist you in accessing this advantageous loan program that is perfect for those who want no down payment and excellent rates.
Other Non-Conventional Loans
While VA loans, FHA loans, and USDA loans are the most common non-conventional loans, there are others available that are not government-backed. For example, renovation mortgages are a more specialized type of loan that can be used to fix up property, while interest-only mortgages are products that cater to investors who can afford a balloon payment at the end of the term.
The products discussed in the following list are not considered traditional mortgage offerings. However, they provide an alternative to conventional mortgage loans and may be the right fit for certain borrowers.
6. Jumbo Loans
Jumbo loans are used to finance home or property purchases that require funding beyond what conforming conventional loans can offer.
The Federal Housing Finance Agency (FHFA) sets a conforming loan limit for each county in the country that is based on the local housing market. Loans that adhere to these limits are called conforming loans, and while they are typically well-matched to the market, some may want more than what is available with the typical loan.
Any loan with an amount higher than local conforming loan limits can be considered a jumbo loan. Mortgage lenders offering these loans tend to require larger down payments and expect borrowers to have significant cash reserves and excellent credit scores.
Pros:
Suitable for high-value real estate properties
More privacy protection than a conforming mortgage loan
Customizable terms
Cons:
Higher interest rates
Higher monthly payments
Strict eligibility requirements
Large down payment
High minimum credit score requirement
7. Super Jumbo Loans
Lastly, we have super jumbo mortgages. These mortgage loans exceed even the high amounts available through a regular jumbo loan, surpassing the limits of both conforming loans and other nonconforming loans.
Those looking to invest in luxury properties, estates, or large-scale investment properties may need to consider a super jumbo loan. Unlike government-backed loans, these cater to affluent buyers and investors looking to purchase and refinance property.
These products offer extremely high loan amounts with customizable loan terms, while private banking services allow borrowers to maintain their privacy. Applying for a loan like this involves a unique underwriting process to ensure the terms match lender and borrower requirements.
Pros:
Extremely high loan amounts
Great for real estate investors
Borrowers can preserve liquidity
Customizable terms
Cons:
Highly sensitive to fluctuating interest rates
Limited availability
Strict financial requirements
Choosing a Home Loan
Understanding the different types of home loans is only the first step in deciding which one is best for you. Here, we’ll discuss some of the major factors you should consider when researching different types of home loans, from your credit score to your home’s purchase price.
Factors
Here are the main factors to consider when choosing a mortgage product:
Purpose: Different types of mortgages cater to different demographics. Investors will typically want a non-conforming product, as they will need a higher loan principal than the average homeowner. Retirees may prefer a fixed-rate mortgage because they can prepare for the monthly expenses, while those who want to keep a home only for a short period of time might choose an adjustable-rate mortgage.
Income: Your income is the main factor determining which loan type will work best for you, because this will decide how much you can afford to pay each month. For example, borrowers with low-to-moderate incomes may opt for fixed-rate loans, while borrowers with more financial flexibility might choose adjustable-rate loans.
Credit score: Your credit score will play a huge role in determining what type of mortgage loan you can qualify for. Some loans have much stricter credit score requirements than others, meaning you’ll have to look at loans from lenders open to your credit situation.
Closing costs: Some loans require a down payment while others don’t, but all loans require closing costs. Take all of your closing costs into consideration before deciding which mortgage type is best for you.
Loan term: Depending on your budget and financial goals, you’ll need to decide on a short-term or long-term loan. Loan periods typically range from 15 years to 30 years for conventional loans, while others offer more flexible terms.
Down payment: The amount you can afford for your down payment will help you determine what mortgage type is best for you. If you can’t afford much, you’ll need to look at a government-backed loan that doesn’t require a large down payment, like a USDA loan or Veterans Affairs loan.
Interest rate: Compare interest rates between loans and lenders to the one that works best for you. Keep in mind that you’ll be choosing between fixed interest rates and variable interest rates.
Working With a Broker
Working with a mortgage broker will make the process of applying for a home loan run as smoothly as possible. When you work with a broker, they’ll help you get pre-approved for your loan and help you understand and compare the loan offers you receive.
Brokers can also assist with the closing process. They’ll provide you with a detailed breakdown of all the closing costs so you know where your money is going.
Your closing costs may include:
Appraisal fees
Title insurance
Origination fees
Additional costs
Refinancing Options
Home loans aren’t just for buying a new piece of property — they can also be used to refinance your current home.
Here are some situations in which refinancing might be a good option:
If market interest rates have decreased since your loan term began
If your financial situation has changed
If your credit score has improved
If you would like to switch your loan type
The benefits of refinancing include:
Debt consolidation
Lower monthly payments
Interest savings
Improved financial flexibility
Home equity access
Mortgage Insurance
Mortgage insurance is an important thing to consider during the homebuying experience. Essentially a risk management tool for homebuyers, mortgage insurance offers both lenders and borrowers financial protection.
The main purpose of mortgage insurance is to protect you if you fall behind on your monthly mortgage payments. It also protects the lender, who will recoup some of their losses should you default.
Mortgage insurance requirements vary by loan type. Some products, like portfolio loans, won’t have any insurance, while your typical conventional loan will have this as a necessity unless you provide a certain percentage of money upfront.
In most cases, you can eliminate PMI once your loan-to-value ratio drops below 80%, meaning that you own 20% of the home outright. Many people choose to provide a 20% down payment to eliminate the insurance right away.
Which Mortgage Loans Are Best For You?
While everyone’s situation is unique, some general factors can help guide you in deciding which mortgage loan type is best for you.
First-Time Homebuyers
When looking at first-time home buyer's loans, you’ll notice the terms and requirements are a bit more limited than with other loans. While they’re not as flexible, loans for first-time homebuyers are an excellent way to get into your first home.
Some of the best loan options for first-time home buyers include:
FHA loans
VA loans
USDA loans
All three of these loan types can help borrowers who can’t afford as much of a down payment.
Military and First Responders
Many of the best loans for first-time home buyers are also ideal for military members and first responders.
If you’re a military member or surviving spouse, VA loans are the best loan type to consider when purchasing a home. In some places, other loan programs may offer mortgage assistance to veterans and first responders, so be sure to research mortgage offerings in your area before making a final decision.
Pride Lending is here to serve the 1 million LGBTQ+ veterans of the United States, helping you throughout the life of the loan. We’re also proud to assist veterans, police officers, and first responders of color who may face challenges getting mortgage products that meet their needs.
Real Estate Investors
The best type of mortgage loan for real estate investors depends on the type of real estate you’re buying and where.
Some loan types to consider as a real estate investor include:
Conventional loans
Jumbo loans
Super jumbo loans
Upsizers
Those looking to move into a larger or more luxurious home will need a unique loan type.
The best loans to consider if you’re upsizing are:
Conventional mortgages with higher limits
Jumbo loans
Super jumbo loans
Home equity loans or lines of credit (HELOCs)
Final Thoughts on Mortgage Loans
Finding the right mortgage loan for you will make your home-buying experience a smoother and more enjoyable process. Unfortunately, though, some populations face greater challenges to owning their own property than others.
83% of LGBTQ+ individuals would like to purchase a home someday, but only 46% of the community owns their own property. BIPOC individuals, too, are disproportionately left out of the housing market; only about 44% of Black individuals own their own homes.
Our team at Pride Lending seeks to change that. We’re the first LGBTQ+ centered mortgage brokerage in the United States, passionate about advocating for those who have been traditionally left out of homeownership.
Whether you’re buying your first home or investing in real estate, the right loan will make all the difference. At Pride Lending, we can assist you in sifting through the many mortgage products available so that you can make the right choice for your specific needs. We’ll also connect you to down payment assistance programs that can reduce the upfront expenses, ensuring you have what you need to succeed.
Pride Lending is a company founded on the belief that everyone deserves to achieve their dream of homeownership no matter their identity. Our team is composed of allies and members of marginalized communities, including LGBTQ+ and BIPOC individuals; we’re passionate about helping those who may been overlooked by other mortgage companies. We’ll work with you to identify your goals and needs, then match you to the right types of mortgage loans for your specific circumstances.
If you’re ready to find the perfect mortgage loan for you, contact Pride Lending to get started today.
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