There are a number of different types of home mortgages out there. There are conventional mortgages, jumbo mortgages, government-insured mortgages and more. Most people will take out one of the following types of mortgages when they buy their home.
Mortgage Type #1: Conventional
This type of loan isn’t insured by the government. There are two different types of conventional loans: conforming and non-confirming loans.
Conforming loans fall within the limits to be backed by either Fannie Mae or Freddie Mac, two government agencies that back most mortgages. This may seem confusing since we just said it isn’t insured by the government, but that’s because a government-insured mortgage is a bit different.
One downside to getting a conventional loan is Private Mortgage Insurance, or PMI. Most lenders require you to pay an additional fee, called PMI, if your down payment is less than 20% of the purchase price.
Another downside is you generally need pretty good credit to get a conventional loan. Your FICO score should be at least 620 to get an affordable rate.
The good thing is you can usually get a conventional loan even with a low downpayment. You can also usually get your lender to cancel PMI once you have at least 20% equity in the home.
Mortgage Type #2: Jumbo Mortgages
A jumbo mortgage is a conventional mortgage that doesn’t conform to the limits set by Fannie Mae and Freddie Mac. Essentially it means the home costs more than they will back, and the limit is based on the local area. In 2018, the price limit in most of the U.S. was $453,100 but it can be higher in areas with a high cost of living.
There are a few downsides to these types of loans. You generally need a sizable downpayment of at least 10 percent, if not 20 percent. You also need to show access to liquid assets and a decent debt to income ratio, otherwise you’ll likely be turned down for the loan.
The advantage is it lets you live in a nice, well-off part of town.
Home Mortgage Type #3: Government-insured Mortgages
There are a few different types of government-insured mortgages.
FHA loans are meant to help people get into a home even if they don’t have a downpayment or great credit. The downside of this type of loan is the borrower has to pay two different insurance premiums. One is paid upfront, and the rest is paid annually for the life of the loan if your down payment was less than 10%.
The advantage is it lets you buy a home, but the downside is it’s more expensive in the long run due to the premium.
VA loans are loans for U.S. military and veterans. They tend to be flexible and have low interest rates. The main downside with these types of loans is the funding fee that is paid upfront, which is based on the price of the home. For those who are eligible, it’s often the best type of mortgage they can get in terms of rates and flexibility.
Do You Have Any Questions?
The mortgage world can be confusing. If you’re wondering which type of loan makes sense for you, send us an email or give us a call.