Are you thinking about buying a home? Whether this is your starter house, the home where you’ll raise your family or the dream home you’ve been working toward your whole life, buying a house is an exciting, momentous milestone in your life. Of course, buying a home is also a major financial transaction—one of the biggest you will make in your lifetime—which means that the process can be stressful if you don’t feel confident about the financial side of the equation. Knowing what to expect from your home loan—and what type of mortgage loan is right for you—will give you the peace of mind you need to focus on all the exciting and positive elements of purchasing a home. In this post, we will explore the common mortgage loan types, from conventional mortgages to VA loans and everything in between.
Let’s start the conversation about mortgage loan types by looking at the most common type of home loan. Appropriately dubbed the “conventional mortgage,” this type of mortgage is what the majority of home buyers will be looking at when they purchase a piece of real estate. Most accurately, a conventional mortgage is less a type of home loan than an entire category of home loans. Loosely defined, a conventional mortgage loan is any loan that is not insured or guaranteed in any way by the federal government. There are several types of government-backed mortgages that we will explore later, including FHA loans and VA loans.
The umbrella of conventional mortgages is extensive, containing sub-categories such as “conforming” mortgages (those that follow guidelines set by Fannie Mae and Freddie Mac) and “non-conforming” mortgages (those that do not follow those guidelines). Typically, a non-conforming mortgage would be a substantial home loan that skews beyond the loan limits set by Fannie Mae and Freddie Mac. These types of loans are sometimes referred to as “jumbo mortgages.” A conventional mortgage is the only category of mortgage loan in which you can have a non-conforming home loan. All government-backed mortgages must comply with these rules and are therefore conforming mortgages.
All sub-prime mortgages—those granted to homebuyers with low credit scores—are also conventional mortgages. No government-backed mortgage types stray into the sub-prime mortgage pool, where loans must follow precise guidelines and usually come with high interest rates and fees.
As mentioned above, mortgage loan types that are not “conventional” home loans are those backed by government agencies. Contrary to a popular misunderstanding, these loans are not given by the government. Instead, they are granted by private lenders but insured or guaranteed by the government. This guarantee means that the private lender issuing the loan will be protected against any losses if the homeowner receiving the loan fails to make payments. Government loan programs are designed to make mortgages more accessible to certain groups of people. Types of government-backed mortgages include:
- VA loans. VA loans are backed by the United States Department of Veterans Affairs (VA). The VA has a loan program designed to make mortgage loans easier to get for military service members and their families. Through this program, service members can receive up to 100 percent financing on a home purchase, which means they can get approved for a mortgage without making a down payment on the house. If a borrower defaults on a VA loan, the VA/federal government will reimburse the private lender for all losses.
- FHA loans. FHA loans are backed by the Federal Housing Administration (FHA), itself a part of the federal Department of Housing and Urban Development (HUD). Though a common misconception is that these types of loans are only available to first-time buyers, they are indeed open to any borrower that can meet specific requirements for credit score and income. Down payments on these loans can be as low as 3.5 percent of a home’s purchase price, though individuals with lower credit scores will have to put up 10 percent. The downside is that all FHA home loan borrowers must pay FHA mortgage insurance rates, which add to monthly payments.
- USDA/RHS loans. USDA loans are backed by the United States Department of Agriculture (USDA). The USDA has a loan program, managed by its Rural Housing Service (RHS), which helps rural homebuyers obtain mortgages provided they meet specific requirements for “steady, low or modest income.” The program is something of a last resort for rural homebuyers, as it is only available to those who cannot “obtain adequate housing” through conventional mortgage loans.
Other Types of Mortgage Lending
Conventional mortgages and government-backed home loans are the two primary categories of mortgage financing. However, there are other mortgage loan types available, depending on your situation. These include.
- Land and lot loans. We typically think of a mortgage loan as a loan that helps someone buy a house. A land and lot loan, as the name implies, is a mortgage designed to help finance the purchase of a piece of vacant land. These loans can be used to purchase lot land (land that may have zoning, associated building permits, survey reports, access to public roads or infrastructure, or access to utilities) or raw land (land with none of those things). Essentially, land and lot loans exist to help buyers purchase lots for building new homes or other types of property development.
- Refinancing is an option for buyers who are already in a home and wish to change the terms of their existing home loan. When you refinance your home, you essentially pay off the old mortgage by replacing it with a new one. The new loan may have better repayment terms (such as lower interest rates) or might offer you a way to pull money out of your existing home equity (a sub-category known as “cash-out refinancing”).
- Home equity loans. Where cash-out refinancing can essentially allow you to sell back some of your home equity to a lender in exchange for cash, a home equity loan enables you to borrow money on a new loan using your home equity as loan collateral.
Talk Home Loan Options with Resource One Credit Union
At Resource One Credit Union, our team is here to help you understand the common mortgage loan types and learn more about what might suit your needs and eligibility. Contact us today to discuss your home loan options.