Unless you can buy your home with a briefcase full of cash, researching mortgage types before you start the search for a home is key. After all, not all mortgages are created equal.
Because knowledge is power, let’s break down the basic mortgage types and what they entail, shall we?
1. Conventional mortgages
Conventional loans are the most common type of mortgage because they don’t have strict regulations on income or home type. They’re backed by private financial lenders rather than the federal government. If you have good credit (620+), a stable job and income history, and can make a down payment of 3%, this is for you—though if you want to avoid paying private mortgage insurance (PMI), raise that down payment to 20%.
2. Conforming mortgage loans
Conforming loans are bound by maximum loan limits set by the federal government. For 2021, the FHFA set the baseline conforming loan limit at $548,250 for one-unit properties. In parts of the country where home prices exceed the baseline limit by at least 115% (i.e., New York City or San Francisco), the maximum loan limits are higher.
3. Nonconforming mortgage loans
Jumbo loans are the most common type of non-conforming loan, and they’re ‘jumbo’ because the loan amounts exceed conforming loan limits. Due to their higher amounts, nonconforming loans can’t be bought or sold by Fannie Mae and Freddie Mac. Since these types of loans are riskier for lenders, you’re required to demonstrate larger cash reserves, have strong credit, and make a down payment of 10-20% minimum.
4. Government insured loans
If you’re a first-time home buyer with a low-to-moderate-income, loans insured by the FHA may be more accessible than conventional loans, as their credit-score requirements are less strict, and you can put down as little as 3.5%. If you’re a military service member or veteran, the VA guarantees 100% financing to you and your spouse with no required down payment. Finally, if you’re a low-income buyer in a rural area, the USDA guarantees loans which require little to no money down, provided properties meet its eligibility criteria.
5. Fixed vs adjustable rate mortgages
In addition to considering the basic mortgage types available to you, choosing between a fixed and adjustable rate mortgage is crucial. While a fixed-rate loan provides a set interest rate for the entire lifespan of your loan, an adjustable-rate mortgage begins with a fixed rate, but ultimately graduates to a fluctuating rate which changes with market conditions. The latter might save you money, but is considered riskier. While 30-year-long terms are common, shorter-terms of 20, 15 and even 10 years are also available. The shorter the term, the higher the monthly payment but the lower your interest costs overall.
Bottom line: it’s always smart to look into your full range of financing options and get a mortgage pre-approval in hand before you’re ready to look at homes or start making offers. You’ll be able to act more quickly and in turn be taken more seriously by sellers, which could make all the difference when it comes to landing the right home for you!