4 Types of Mortgage Loans for First-Time Home-Buyers

For every home, there is a mortgage. Well, unless you’re loaded with cash, in which case you can probably go ahead and stop reading. If you’re still following along, you’re probably a first-time home-buyer. That means not only are you in the market for a home, but you’re going to need a home loan to pay for it. Shopping for a home can be fun and exciting, although probably a bit stressful at times. Shopping for a mortgage? Emphasis on the stressful part.

But for right now, sit back and relax. Just don’t relax too much, because you don’t want to doze off and lose your place as we walk through the mortgage loan options available to you.

Conventional Mortgages

If you were to look up the word “conventional” in the dictionary, some synonyms would be “regular,” “traditional,” or “typical.” All words that could be used to describe conventional mortgages, which are the most common type of home loans offered today.

 

What exactly is a conventional mortgage? It’s a home loan that is not insured by the federal government, so the lender assumes all of the risk. Conventional mortgages are a popular choice for home-buyers because there are fewer regulations on income, home type, and home location. In other words, they don’t have to be too picky. But lenders will require that you have a minimum FICO score of 620 and a debt-to-income ratio of 45% to 50%.

 

Conventional mortgages know what they want in a borrower. They are looking for a home-buyer with good credit, a stable source of income, and a down payment of at least 3%. However, if your down payment is less than 20%, the lender will need you to buy private mortgage insurance. Private mortgage insurance provides protection for the lender in case you stop making payments on your home loan. You would be responsible for paying the monthly premiums.

Government-Insured Mortgages

If you finished reading that last section and were left wondering what a government-insured mortgage is, brace yourself, because we’re about to solve that mystery. To be clear, the federal government is not a lender. You can’t call up your representative and ask them for their current interest rates. But there are government agencies that are willing to insure loans for borrowers who might not qualify for a conventional home loan.

FHA Loans

The Federal Housing Administration (FHA) is one example. If you can’t  make a large down payment or you don’t have the best credit, the FHA wants to help you become a homeowner. Of course, there are conditions. You can make a down payment as low as 3.5%, but to be approved you’ll need to have a minimum FICO score of 580. FHA loans also require two mortgage insurance premiums, one paid upfront and the other paid annually.

USDA Loans

If you’re looking to settle down in a rural area, the U.S. Department of Agriculture (USDA) offers a loan program for low- to moderate-income borrowers. The USDA has lower mortgage insurance requirements than FHA loans and lets borrowers buy a home with no money down. All the USDA asks is that you buy a home in an area that meets their eligibility requirements. Borrowers will also be expected to meet their income requirements.

VA Loans

For eligible active duty U.S. Military members and veterans, the U.S. Department of Veterans Affairs (VA) offers low-interest mortgages, with no down payment required. No private mortgage insurance is needed for a VA loan, and borrowers usually have their choice between fixed- and adjustable-rate options with a variety of loan terms.

Fixed-Rate Mortgages

If you’re the type of person who likes to eat at the same restaurant all the time and you always order the same meal then a fixed-rate mortgage should be music to your ears. With a fixed-rate mortgage, there are no surprises. You pay the same amount every month. The interest rate on your loan never changes, regardless of whether your loan is for 15 or 30 years.

 

Fixed-rate mortgages are a good match for home-buyers who plan to put down roots. You might end up paying more interest with a longer loan, but if stability is important to you, a fixed-rate mortgage offers a rock-solid foundation for both you and your home.

Adjustable-Rate Mortgages

Do you like roller coasters? Not everyone is a fan. But just like with fixed-rate mortgages, there is comfort in knowing what to expect. There is more risk involved with an adjustable-rate mortgage. And with risk, there is reward.

 

As you’d expect, an adjustable-rate mortgage is the opposite of a fixed-rate mortgage. To start, you’ll have a fixed interest rate for a period of time, but then your interest rate will fluctuate with the market after that. Your initial interest rate might be low, which will save you money on interest payments. The risk is in whether the rate will increase or decrease beyond that initial period.

 

If you don’t plan to stay in your home for long, the savings on interest could be worth it.

 

And that about covers it. Thanks for sticking with us through to the end! If you have any questions about the different types of mortgage loans, please get in touch with us. We’re here to help you!

 

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