Every person aspires to own their own homes at some point in their lives. While some work very hard and set aside a portion of their resources to their future homes, some think about getting a mortgage loan. Some people stress about how to pay their loans back. Creditors provide different types of mortgage loans depending on the credit scores and the capacity of the debtor.
Here, we have listed the top five (5) common mortgage loans anybody may choose from.
Types of mortgage loans
A type of mortgage loan that the federal government does not insure. It’s classified into two types.
This means that the amount of loan is bound to the limits provided by Fannie Mae or Freddie Mac. These government agencies support and protect most of U.S. mortgages. Its limit varies yearly.
One of the benefits of this type of loan is that applicants with good credit scores get lower interest rates. Hence, they pay lower monthly mortgage and spend less with the on-going loan.
This type of loan hinders Fannie Mae or Freddie Mac from purchasing it. Non-conforming loans include jumbo loans. With this type of loan, debtors borrow a larger amount of money than conforming loans.
- People looking for their first or secondary homes use this type of loan.
- Costs related to the loan tend to be more affordable than the other existing types of mortgage loans.
- Cancellation of PMI as soon as 20% equity has been achieved.
- Down payment as low as 3% as long as backed by Fannie Mae or Freddie Mac.
- Requires a minimum FICO score of 620, the higher the better.
- Debtors need a 45-50% debt-to-income ratio.
- If down payment amounts to less than the 20% of the total price, debtors need to pay PMI.
- Borrowers need to present proper documentation showing their income, assets, employment record, and down payment.
Generally, jumbo mortgages belong to conventional loans that possess non-conforming loan limits. For people who aspire to a more expensive abode (beyond federal loan limits), this may be a good fit for you. To those who wish for a house in a higher-cost area, choose this. However, it requires more documentation in order to qualify.
- This type allows people to buy their dream house located in a prime area.
- Competitive interest rates
Cons of jumbo mortgages
- A 10-20% down payment requirement
- The buyer needs a FICO score of 700 or higher. Other creditors accept a minimum score of 660.
- Requires a debt-to-income ratio below 45%
- Creditors need a list of the significant assets owned that cost 10% of the loan amount. Either in cash or savings
To those aspiring to get their luxurious home, this type of loan suits you. It requires a good credit score, high income, and sufficient down payment. A number of creditors offer competitive rates for this loan and determine it through Bankrate’s calculator.
The government helps its citizens get a home for themselves and their families. Moreover, the government created agencies wherein citizens consult when they want loans for their homes. Those agencies include:
- Federal Housing Administration (FHA)
- U.S. Department of Agriculture (USDA)
- U.S. Department of Veteran Affairs (VA)
Aspiring homeowners who do not have a huge amount for down payment make use of this type of loan. They just need a FICO score of 580 in order to obtain the maximum 3.5% financing from FHA. However, people who have a credit score of 500 resonates with a 10% down payment.
This type of loan needs two (2) mortgage insurance premiums. The first one requires an upfront payment while the other one requires debtors to pay annually while the loan lasts. The annual payment occurs when debtors pay in less than 10% down payment which affects the overall cost of the mortgage.
These loans give veterans and their families flexible and low-interest mortgages. It does not require any down payment or PMI. However, the seller may pay for the closing costs. A certain funding fee charged on these VA loans helps offset the cost of the program to taxpayers. Moreover, the funding fee, together with the closing costs, may be rolled into the loan or paid upfront during closing.
This type regulates low to moderate income debtors and lets them buy their homes in rural areas. Debtors choose their home in a location accredited by the USDA. In addition to that, they must meet the requirements in order to qualify. A number of USDA loans refrain from requiring a down payment, especially to qualified debtors with low-income rates.
- Helps most people get their home even if they fail to obtain a conventional loan.
- Requirements are less strict than other mortgage loan types.
- Needs a small amount for a down payment
- Caters to first-time and repeat buyers
- Mandatory mortgage insurance premiums paid either monthly, quarterly or annually depending on the terms and conditions. Payment must not be canceled on other loans.
- Results in a higher borrowing cost
- Requires more documentation to prove eligibility, documents depend on the type of loan
With a fixed-rate mortgage, borrowers pay the same amount with the same interest rate as long as the loan exists. The monthly amortization stays the same and the duration comes in years, 10, 15, 20 or even up to 30 years.
- Monthly payment stays the same through the duration of the loan
- Creating a budget stays the same through and through.
- As the years go by, borrowers pay more interest.
- It takes a while to build equity for your respective homes.
- Interest rates get higher than other mortgage types.
This type differs from fixed-rate loans as its interest rates changes depending on how the market is. The majority of ARM products set a definite interest rate that lasts for a few years before the loan changes its interest rate.
- Most borrowers enjoy the lower rates for the first few years of their homeownership.
- Enough resources for interest payments.
- Due to the changing interest rates, mortgage payments become unaffordable. This gives borrowers a loan default.
- When the market changes, the home values also change. This leads to difficulty in selling the house in the coming years.
Different types of mortgage loans exist so people can choose the right type that fits their needs. When applying for a mortgage loan, don’t forget to consult Calcite Credit Union.