Knowing the Different Types of Mortgages
Choosing the right home is very difficult at this point in time since the real estate market is very active and houses sell quickly. Moving quickly on your desired purchase will be necessary and this might bring stress to the process. With this in mind, it is best that you prepare your financing in advance. This ensures the financing is in place when you need it and will allow you to move as quickly as the market demands.
Before you begin your house search, explore the types of mortgages available to you. There are several mortgage types available. Finding the right fit for your purchase will depend upon several financial factors you bring to the table.
- The amount of your purchase
- The amount of your down payment, and
- A number of conditions about your purchase
Let’s take a look at your options.
Jumbo Loan: Consider a jumbo loan if:
- Your purchase will be a large amount and the home price exceeds normal loan limitations
- You will bring a significant down payment to the purchase—often 10 to 20% will be required
- Your credit score is 700 or higher
- Your debt-to-income ratio is below 45%
- You can demonstrate significant assets on hand
- You are willing to take the time to provide in-depth qualification documentation
If you plan to finance a large purchase and are properly prepared, consider a jumbo loan.
Conventional Loan: Conventional loan mortgages are offered by banks and lending institutions and are not backed by the Federal government. Expect conventional loans to be rather flexible compared to some loan types.
- The loan size, credit score, and debt-to-income ratio will follow the Federal Housing Finance Agency standards; in 2022 the loan limits are between $647,000 and $970,800, depending on the location.
- The loan can be used for a primary home, a secondary home, or even an investment property.
- The lender can waive private mortgage insurance (PMI) after 20% of the equity is paid.
- The down payment can be flexible—as low as 3% of the loan amount under certain circumstances.
- A credit score of 620 or higher will be required and your DTI will need to be 43% or lower.
Conventional Loan: Fixed-rate mortgages
- As stated, a fixed-rate mortgage establishes a fixed interest rate for the life of the mortgage. This stabilizes the payment, making budgeting easier.
- The length of the loan can be flexible, from 8 to 30-years. The most popular terms are 15-year and 30-year.
- This is the most popular type of mortgage for owners who plan to stay in their home for 10-years or more. Mortgage payment stability is a major benefit.
Conventional Loan: Adjustable-Rate Mortgages (ARM)
- Adjustable-rate mortgages have an introductory interest rate that is typically lower than a fixed-rate mortgage for the same loan amount. However, over a period of time, the rate will fluctuate with the current interest rate; it could go up or it could go down.
- A sample ARM might be a 7-year/6-month ARM. The (lower) interest rate would apply for the initial seven years and the interest rate could adjust every six months afterward.
- The interest rate might decrease, lowering your monthly mortgage payment
- The interest rate might increase, making it difficult or impossible to meet payments.
- The interest rate WILL fluctuate after the initial, introductory period
- An ARM might be beneficial when purchasing a home that you intend to own for a short period of time. Since both interest rates and real estate prices fluctuate, it is very important that you read the “fine print” and know the loan details.
Government-Insured Loans: While the Federal Government is not a mortgage lender, it is in the interest of a few government agencies to encourage personal economic growth and homeownership among particular groups of people.
- The Federal Housing Administration encourages homeownership among first-time homebuyers. Expect FDA loans to be strictly regulated, since typical homebuyers do not have home ownership experience.
- Credit scores must meet a minimum of 580; it could be lower with a larger down payment.
- The down payment might be as low as 3.5%
- Expect PMI, since first-time buyers have no mortgage payment experience
- The US Department of Agriculture encourages homeownership in rural locations for farmers and people that will contribute to farming communities.
- USDA loans are offered to low- to moderate-income borrowers
- USDA loans are offered for properties in eligible areas
- Down payment may not be required, but fees may be attached, including an upfront fee of 1% of the loan amount and an annual fee.
- The Veterans Administration offer flexible, low-interest mortgages for members of the U.S. military and their families.
- VA loans often do not require a down payment or PMI.
- A minimum credit score may not be required.
- A funding fee or percentage of the loan amount may be added to the mortgage to help the VA cover administrative costs.
- Obviously, government-backed loans are not for everyone, but if you qualify they provide substantial benefits. Credit rating and down payments are relaxed and PMI may not be required.
- However, regulations may restrict the size, condition, and location of available homes.
- Loan amounts may be limited and the borrower must live on the property.
- The cost of government participation will be compensated by the borrower.
These are the most common mortgage types, but other types of loans are available, such as construction loans and interest-only mortgages. Take some time to shop around, ask questions, and explore your options. Some lenders are local—banks, credit unions, and mortgage companies. Some lenders are available online. These lenders will help you navigate the loan process, including government-back loans.
Have questions about which mortgage is best for you?
With over 5 decades of experience in the Houston Housing Market, The Matthews Team can help you choose the right mortgage for your next home or property purchase. If you have any questions, give us a call at 281-440-7900 or send us an email. We’re happy to help!