Different Types of Mortgages
If you’re currently in the market for a home, it will speed up the process considerably if you’re familiar with the various mortgage options available. Finding a mortgage that suits your current financial needs can be challenging, but understanding the various types of mortgages available and their requirements can make the process less challenging. Here are the most common types of mortgages, along with any specific requirements for each.
Conventional Fixed Rate Mortgage
A conventional fixed rate mortgage is the most popular type of mortgage. A fixed-rate means that your interest rate will never change throughout the life of the loan, ensuring that your monthly payment remains the same. Requirements for conventional mortgages typically include a credit score of at least 620, a down payment between 5 to 20 percent, and monthly insurance if your down payment is less than 20 percent. While these requirements are not set in stone, and can vary from lender to lender, those interested in a conventional loan should be able to meet these requirements.
Conventional Adjustable Rate Mortgage
Adjustable rate mortgages (ARM) may be a good fit for someone just starting out that desires a smaller monthly payment for the first year of the loan, but expect to increase their income level in the years following. Because ARMs have a fluctuating interest rate that can change from year to year, those with an ARM should expect their payment to change yearly as well. While there are some obvious benefits to an ARM, home buyers can often find themselves in trouble quickly if monthly payment rates rise too quickly.
FHA loans are a good option for first-time homebuyers, or those without a large down payment. FHA loans require only 3.5 percent down, and often finance homes for buyers with credit scores as low as 580, though again, this can vary from lender to lender. FHA loans are backed by the U.S. Government and insures the lender for any losses from a borrower default. And while conventional loans with less than 20 percent down also require mortgage insurance, it can typically be canceled when home equity rises, payment of FHA mortgage insurance is required for at least the first 11 years of the loan.
VA Loans are an excellent way to finance a home, but they’re only available to military service members and family. Like FHA loans, VA loans are guaranteed by the U.S. Government from losses incurred through buyer default. One major benefit of a VA loan is 100% financing, so no down payment is required.
Though most people are unaware of this loan program, the USDA offers a program for those looking to purchase a home in a rural area. USDA loans are primarily for low-income buyers whose income is at or below 115 percent of the median income for the area. USDA loans also offer 100% financing, with no down payment required. You’ll have to be sure that the property you’re interested in purchasing is in an eligible area.
Buying a home can be a stressful event, but knowing what to expect can significantly reduce stress levels. Happy house hunting!
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