For most people, buying a home means obtaining some sort of financing. Unless you have a nest egg just lying around that you can use to pay for your home, you are going to need a home loan. This might seem straightforward, but there are a few different types of home loans to consider and applying for any one of these types of loans can be a complex process.

You should also know that each of the types of home loans comes with its own set of advantages and disadvantages. Here, we are going to talk about the types of home loans there are, separating them two broad categories: the conventional home loans (also known as a mortgage) and government-backed home loans. Let’s take a look at each in detail.

Conventional Home Loans

This is the type of home loan you are most likely to think of when you think of buying a house (think of the mortgage you get from your bank or another lender), whether it is a resale or new construction home. This loan is best suited to people with solid credit and secure employment and income.

While you can pay as little as 3% down with this home loan, you must have a credit score of at least 620 to qualify. It is also important to keep in mind that a down payment lower than 20% will require you to pay for private mortgage insurance (PMI). Fortunately, when you pay down your mortgage to the point where you have 20% equity in your home, you can cancel your PMI or refinance your mortgage to eliminate the need for it.

Conventional mortgages can be either conforming loans or non-conforming loans. Conforming loans are loans with an amount that does not exceed the maximum limits established by the Federal Housing Finance Agency (FHFA). On the other hand, non-conforming loans do exceed the FHFA limits. An example of a non-conforming loan is a Jumbo loan, which is a large loan that goes well above the FHFA limits in multiple counties.

Conventional mortgages can also be split into the following two types:

• Fixed-Rate Mortgage: This is a mortgage that has an interest rate that stays the same over the entire life of the loan, which can be 15 or 30 years. This ensures your monthly payments remain the same throughout the lifetime of the loan. However, you may miss out on lower mortgage rates if they go down while you are paying off your loan. The fixed-rate mortgage is typically recommended for people who are going to be living in their home for at least 10 years.

• Adjustable-Rate Mortgage: This is a 30-year mortgage, during which the interest rate you pay can change based on the market interest rate. You will likely start with a fixed rate of interest of a period of 5 to 10 years, known as the introductory period, and then your interest rate will change based on market rates. This means your interest rate could go up or down. However, you will have a rate cap to protect you from rates that are rising quickly.

Government-Backed Home Loans

Government-backed loans are types of home loans that are insured by government agencies, which means they carry a lower risk than conventional loans. They can be used by first-time and repeat homebuyers. If you don’t qualify for a conventional loan, you may be able to get one of these three government-backed loans:

Federal Housing Administration (FHA) Loans

These are home loans that are insured by the FHA. You can buy a home as long as your credit score is at least 580 and you have a down payment of 3.5%. Plus, if you have at least 10% down, you may be able to get a loan with a credit score as low as 500. You will also have the choice of paying your mortgage insurance premiums upfront or rolling them into your mortgage payments.

United States Department of Agriculture (USDA) Loans

The USDA insures loans for homes in eligible rural areas that are geared toward low- to middle-income buyers. And no, you do not have to be a farmer to qualify. However, you will have to meet specific income limits to qualify for a USDA loan. Fortunately, in some cases, particularly for low-income buyers, a USDA loan does not require a down payment.

Veterans Affairs (VA) Loans

A VA loan is a low-interest loan available to members of the military and their families. There is no down payment or mortgage insurance required. In addition, there is a cap on the closing costs, which may even be covered by the seller. However, you will need to pay a VA funding fee for the loan, although this and the closing costs (if you have to pay them) can be rolled into your monthly payments.

Other Types of Home Loans

There are a few other types of loans that you may qualify for, depending on your circumstances. These include:

• Interest-only mortgages: This is a mortgage where you would pay only the interest for the first 5 to 7 years, after which your payments would increase and go strictly toward paying down the principal.

• Balloon mortgage: This is a mortgage that requires you to make payments for the first 5 to 7 years, based on a 30-year mortgage, but at the end of that term you are expected to make a lump sum payment for the remaining balance.

• Construction loans: These are loans that may work for you if you are building a new home. You may have the option of getting a separate construction loan and mortgage or combining these into a single loan. This type of loan will require a higher down payment and proof that you are financially capable of paying off the loan.

For more information on the types of home loans available, reach out to one of our Centex team members today and have all your questions answered.

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Published 03.31.22