When you’re starting your journey of home ownership, the first step is to research the types of home loans available to you. We know it can be a challenge to find the right mortgage loan, and if you’re a first time home buyer, it can even be stressful. We’re here to educate you on what’s out there and what to consider when deciding the loan that works for you.
What Are the Different Types of Mortgage Loans?
Fixed vs. Adjustable rate
When you’re borrowing for your home, you may not know types of home loans for first-time buyers. The first choice to consider is which loan you want: a fixed rate or an adjustable rate mortgage loan. Loans can fit into one of these two categories.
For the entire repayment term, fixed-rate mortgage loans have the same interest rate. This means your monthly payment will stay the same. This is true for long-term financing options, such as the 30-year-fixed rate loan—the same interest rate, and equal monthly payment.
There are adjustable-rate mortgage loans. These ARMs have interest rates that will change or “adjust.” It may seem more comfortable, but could potentially result in an increased interest than a fixed-rate loan. This loan suits best for someone looking to pay off their mortgage in five years or less. They may even consider refinancing before the ARM’s rate increases.
Government-insured vs. Conventional loans
Federal Housing Authority (FHA) Loans: These are the most popular government loan types for first-time buyers. Many first-time home buyers choose this option because of its more lenient credit score requirements coupled with down payment requirements. People with a 580 credit score may still qualify for a 3.5% down payment. Options vary by state.
- Pros: FHA loans are the most accessible. They enable potential homeowners a chance to buy without a substantial down payment. They also allow for a non-occupant/ co-signer, who must be related to you.
- Cons: Requirements of FHA loans may vary. As of late, there is an up-front mortgage premium and monthly mortgage insurance. When you have these ratios as a guideline, it will be less stressful for you to calculate the amount of mortgage that you should borrow for your home finance.
USDA Loans: If you live in a rural area and meet certain income requirements, the US Department of Agriculture could help you buy a home. They offer home loans with up to 100% financing. This often means you don’t need to make a down payment. They require lower monthly mortgage insurance (MI) payments than an FHA loan.
This type of mortgage loan offers to “rural residents who have a steady, low, or moderate income. But they may not be capable of obtaining adequate housing through conventional financing.”
VA Loans: Military veterans, this one is for you! The US Department of Veteran Affairs offer loan services to members of the US military, veterans, and their family members. If you’re eligible, you could qualify for a loan that requires no down payment or monthly mortgage insurance.
This could be beneficial if you don’t have to put any money down or deal with monthly payments—borrowers could save thousands per year.
Jumbo vs. Conforming loan
Jumbo loans are larger than others on this list. That’s why they often have strict requirements. If you’re applying for a jumbo loan, many of them require a credit score above 700 and a 15% down payment.
Conforming loans meet the underwriting guidelines of Fannie Mae or Freddie Mac. These are two government-controlled corporations that purchase and sell mortgage-backed securities.
A jumbo loan exceeds the confronting loan limits established by Fannie Mae and Freddie Mac. Because the size of the loan, this mortgage represents a higher risk for the lender. So, jumbo borrowers typically must have excellent credit and larger down payments compared to conforming loans. Interest rates are generally higher.
Buy Your Dream Home with First Choice Mortgage
Now that you know the different types of home loans, allow First Choice Mortgage to help you navigate each one to find out which is best for you. We’re ready to help you buy your new home. Learning is important, and when you couple this with our experience, passion, and knowledge in the industry, we know you can get the home of your dreams.