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As a prospective home buyer, it’s just as important to research types of mortgages as the neighborhoods you want to live in. Applying for a home loan can be complicated, and deciding which type of mortgage best suits your needs early on will help direct you to the type of home you can afford.
There are a number of home loans to choose from when you buy or refinance a home, so it's important to fully understand the advantages and disadvantages of each type before you make a decision. Depending on the type of mortgage you choose, you’ll have different requirements that influence your rate and the length of the loan. Selecting the right mortgage for your situation can lower your down payment and decrease the overall interest rate over the life of your loan.
To find the best mortgage for your prospective home, understand the types of loans you’re able to pursue. The factors below can influence the types of mortgages you’ll qualify for:
Estimated down payment: The size of your down payment can impact the mortgage rate lenders will give.
Monthly mortgage payment: Mortgage lenders will look at your income and assets to determine the total loan amount you can afford to pay back. When calculating your budget for your monthly mortgage payment, consider the principal amount, interest and taxes, mortgage insurance, utilities, and any homeowner’s fees.
Credit score: Your credit score will play a large role in determining the interest rate on your loan.
Mortgages are typically considered to be conforming conventional, nonconforming conventional, or a government loan. If your loan meets the guidelines set forth by either Fannie Mae or Freddie Mac, it is considered a conforming conventional loan. If your loan is insured in some way by a government agency it is considered a government loan. If it does not meet any of the previous loan guidelines it is then considered a nonconforming conventional loan.
A conforming loan refers to a conventional mortgage that meets guidelines set by Fannie Mae or Freddie Mac. These loan requirements include the following:
Loan amount must be below maximum loan limit: In order to qualify as a conforming loan, it must be below the maximum loan amounts set by the Federal Housing Finance Agency (FHFA) which are set annually. The maximum loan amounts are set for the entire country but can vary for high-cost counties.
Meets lender-specific criteria: Your loan must meet the lender’s specific criteria to qualify for a conforming mortgage. For example, you must have a credit score of at least 620 to qualify for a conforming loan. You may also need to take property guidelines and income restrictions into account when you apply for a conforming loan. One of our licensed mortgage loan officers can help determine if you qualify based on your unique financial situation.
Conforming loans have well-defined guidelines and there’s less variation in who qualifies for a loan. Making conforming loans less risky. This means that you may be able to get a lower interest rate when you choose a conforming loan.
If your loan doesn’t meet conforming or government loan standards, it’s considered a non-conforming loan. Nonconforming loans have less strict guidelines than conforming loans. These loans can allow you to borrow with a lower credit score, take out a larger loan or get a loan with no money down.
You may even be able to get a nonconforming loan if you have a negative item on your credit report, like a bankruptcy. Most nonconforming loans will be either jumbo loans or non-qualified mortgages (non-QM).
A government-insured mortgage is just what it sounds like: a mortgage loan that is insured by the government. Government-insured mortgages are sometimes referred to as government-backed mortgages, but the definition is the same. It means that the mortgage is backed by the government.
The government doesn’t issue the mortgage or lend the money directly to borrowers. The loan is originated (or funded) by a mortgage company. The loan is then insured (or guaranteed) by the government.
Depending on the type of mortgage applicant you are, you’ll find various advantages and disadvantages of a home loan. Whether you’re a first-time buyer, or are downsizing or refinancing, consider the type of applicant you are before selecting a mortgage.
Conventional mortgages are the most common type of mortgage. That said, conventional loans do have stricter regulations on your credit score and your debt-to-income (DTI) ratio.
You can buy a home with as little as 3% down with a conventional mortgage. You’ll also need a minimum credit score of at least 620 to qualify for a conventional loan. You can skip buying private mortgage insurance (PMI) if you have a down payment of at least 20%.
However, a down payment of less than 20% means you’ll need to pay for Private Mortgage Insurance (PMI). Mortgage insurance rates are usually lower for conventional loans than other types of loans (like FHA loans).
Conventional loans are a good choice for most borrowers who want to take advantage of lower interest rates, higher credit scores, and larger down payment.
Interest rates and fees tend to be lower than a nonconventional loan.
Your down payment can be as little as 3% for qualifying loans.
You have to pay PMI if the down payment is less than 20%.
Stricter qualifications that require a minimum credit score of 620 and a lower DTI.
Those with stable income, who have at least 3% down, and have good to great credit scores and a strong credit history.
A fixed-rate mortgage has the same interest rate and principal/interest payment throughout the entire life of the loan. The amount of your monthly payment may fluctuate due to changes in property taxes and insurance premiums, but for the most part, fixed-rate mortgages offer you a very predictable monthly payment.
A fixed-rate mortgage might be a better choice for you if you’re currently living in your “forever home". A fixed interest rate gives you a better idea of how much you’ll pay each month for your mortgage payment, which can help you budget and plan for the long term.
You may want to avoid fixed-rate mortgages if interest rates are high. Once you lock in, you’re stuck with your interest rate for the duration of your mortgage unless you refinance. If rates are high and you lock in, you could overpay thousands of dollars in interest. Speak to a local mortgage broker to learn more about how market interest rates are trending.
Monthly payments don’t change over the life of your loan, making it easier to plan a budget.
You may end up paying more in interest over time if the rates are high.
Buyers that are purchasing or refinancing their forever home.
The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). ARMs are 30-year loans with interest rates that change depending on how market rates move.
You first agree to an introductory period of fixed interest when you sign onto an ARM. Your introductory period is typically 3, 5, 7, or 10 years. If you sign on for a 5/1 ARM loan, for example, you’ll have a fixed interest rate for the first 5 years. During this introductory period, you pay a fixed interest rate that’s usually lower than a 30-year fixed loan.
After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to calculate how rates are changing. Your rate will go up if the index's market rates go up. If they go down, your rate goes down.
ARM loans include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For example, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.
ARMs can be a good choice if you plan to buy a starter home before moving to your forever home or plan on moving within a few years of taking a new mortgage. You can easily take advantage and save money if you don't plan to live in your home throughout the loan’s full term.
These can also be especially beneficial if you plan on paying extra toward your loan early on. ARMs can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.
Gives lower interest rates for the initial introductory period.
If the rate increases, it can dramatically increase your monthly payments.
Those who are purchasing or refinancing a home and don’t expect keep there mortgage for the loan’s full term.
Government-backed loans are insured by government agencies. When lender and brokers talk about government-backed loans, they’re referring to three types of loans: FHA, VA and USDA loans. These loans are less risky for lenders because the insuring body foots the bill if you default on your mortgage. You may qualify for a government-backed loan if you can’t get a conventional loan.
Each government-backed loan has specific criteria you need to meet in order to qualify along with unique benefits, but you may be able to save on interest or need a lower down payment if you qualify.
FHA loans are insured by the Federal Housing Administration. An FHA loan can allow you to buy a home with a credit score as low as 580 and a down payment of 3.5%. With an FHA loan you may be able to buy a home with a credit score as low as 500 if you pay at least 10% down.
USDA loans are insured by the United States Department of Agriculture. USDA loans have lower mortgage insurance requirements than FHA loans and can allow you to buy a home with no money down. You must meet income requirements and buy a home in a suburban or rural area in order to qualify for a USDA loan.
VA loans are insured by the Department of Veterans Affairs. A VA loan can allow you to buy a home with zero down payment and lower interest rates than most other types of loans. You must meet service requirements in the Armed Forces or National Guard to qualify for a VA mortgage loan.
It is possible to to get a lower interest rate and a lower down payment with the possibility of zero down payment.
Qualify for these loans are often easier than conventional loans.
You must meet specific criteria to qualify.
Many types of government-backed loans require some sort of mortgage insurance. can result in higher borrowing costs and payments.
Those who have lower credit scores, less funds for a down payment, or don’t qualify for a conventional loan.
Jumbo loans are for those that desire to purchase or refinance a home with a loan amount that exceeds the limits of conforming conventional loans. You usually need a jumbo loan if you want to buy a high-value property. The conforming loan limit is set by the Federal Housing Finance Agency (FHFA) annually.
Jumbo loan interest rates are usually slightly higher than conforming interest rates, but they’re more difficult to qualify for than other types of loans. You’ll need to have a higher credit score, larger down payment, and a lower DTI to qualify for a jumbo loan.
You can borrow more for a more expensive home.
It is more difficult to qualify, typically requiring a higher credit score, significant assets, and a low DTI ratio.
You’ll need a large down payment, typically between 10% - 20%, in a few situations a fiver percent down payment may be available.
Those who need a larger loan amount for a higher valued home, have a good to excellent credit score, and low debt to income ratios.
The best type of mortgage loan depends on your individual preferences and situation. Prior to choosing your home loan, it may help to speak to one of our mortgage loan brokers. We can reached at (801) 272.0600.
Prospective home buyers have a lot to consider when choosing from the different types of mortgage loans available. Your credit score, income, debt, and property location all influence the home buying process and type of mortgages you can get. Advanced Funding Home Mortgage Loans' home loan experts can assist with a personalized solution to determine the best fit for you.