Five types of home loans: understanding your mortgage options

Shopping for a mortgage is a critical step in the homebuying journey — there are plenty of options to explore, whether you’re buying your first home, your dream home or something in between. The following article will break down the types of home loans you may come across to help make the right choice for your needs and lifestyle.

What to look for in a home loan

So, where to begin? There are a few helpful things you can ask yourself when thinking about the different types of home loans to dial in on the one that fits your needs:

1. What type of down payment can you afford?
2. Do you qualify for any type of government assistance?
3. Are you a first-time homebuyer?
4. Are you considering a 15 or 30-year mortgage?
5. What does your credit report look like?

The answers to these questions will help you narrow down the type of mortgage you should focus on. For example, if you have good credit and can put down a substantial down payment, a conventional loan may be right for you. Alternately, if your credit score is on the lower end or you’re a former service member, you may qualify for assistance.

Types of mortgage loans

Conventional mortgage

Let’s start with the most basic types of home loans. Conventional mortgages aren’t insured by government entities, and are a common mortgage for homebuyers. You can get a conventional mortgage through a private lender. A private lender would be a bank, mortgage company, credit union or any other private business through which you acquire a mortgage.

To qualify for a conventional loan, you must typically have relatively good credit, a stable work history and/or income and the ability to make a down payment of a certain percent, usually ranging between three to five percent to start, which tends to require the purchase of mortgage insurance. But if you can make a 20 percent down payment, you can often avoid a private mortgage insurance requirement.

In general, there are two types of conventional loans: conforming or non-conforming:

• Conforming: The loan is held to the borrowing standards of Fannie Mae and Freddie Mac or other federal regulations. This means, above all, that there are borrowing caps, or an upper limit to how much you can borrow. This number will vary by MSA or geographic region and is calculated based on local cost of living estimates.
• Non-conforming: The loan isn’t held to any limit set by Fannie Mae or Freddie Mac and doesn’t use government funding. This poses a higher risk for the lender. Non-conforming loans are more competitive. They require a higher proof of income, higher credit and larger down payments.

So, as a general rule, you would typically use a conventional mortgage if you’re looking to buy a home and may not need or qualify for any government assistance or first-time homebuyer programs. Federal housing administration (FHA) loans and first-time homebuyer programs

A first-time homebuyer program provides financial help to first time homebuyers and is available at a local or national level. Some programs may boost your chances of owning a home in a specific location, while others may be attached to your profession or military affiliation.

There are many programs to choose from, depending on what type of assistance you are looking for and your personal qualifications. FHA loans are government-backed loans designed for people with low to moderate incomes who have trouble qualifying for conventional loans.

If it seems like FHA loans and first-time homebuyer programs have some overlap, they do. Here are some examples:

• General FHA Loan: Government backed FHA loans are good for buyers with low credit scores who want to keep their down payments and closing costs low.
• Good Neighbor Next Door: This type of loan is directed toward law enforcement officers, teachers (pre-k to 12th grade), firefighters and emergency medical technicians featuring discounts on homes in revitalized areas. In return, there is usually a minimum stay.
• VA Loan: U.S. Department of Veteran Affairs aids servicemembers, veterans and surviving spouses to help buy a home.

While all the above are helpful for specific circumstances, first-time homebuyers may want to go with a conventional loan. There tends to be less paperwork and a shorter approval process, and you can often own your home faster at lower total costs, depending on the details.

Just remember that conventional loans aren't insured or guaranteed by government agencies. They are usually available with fixed or adjustable-rate terms, and often require higher credit scores and down payments than FHA loans.

Fixed rate loans

Fixed rate loans have the same interest rate for the entire life of the loan, whether it’s 15 or 30 years. So if you sign onto a mortgage with an interest rate of 4.5 percent, then for the entire 30 years it will remain 4.5 percent, unless you decide to refinance down the line or sell your home.

Adjustable-rate mortgages

Think of adjustable-rate mortgages (ARMs) as the opposite of a fixed rate mortgages. After a certain number of years, your interest rate will start to fluctuate with the market including 6 month ARM periods of a SOFR ARM. These can be risky if you cannot afford a higher interest rate than the one you signed on with, although there is usually a cap for how high it can go.

Jumbo mortgages

Jumbo mortgages are a non-conforming home loan that help finance more expensive loans. These non-confirming loans have higher loan amounts and typically have a different interest rate than conforming loans.

How to pick the right mortgage loan for you

The right mortgage loan for you will depend on a number of factors:

1. How much you can afford
2. Your credit score
3. Your income and job history
4. How long you plan on staying in your home
5. How much risk you are comfortable with
6. You or your spouse's service member or veteran status
7. Whether you can afford a 15- or 30- year mortgage

Now that you’ve learned about the different types of home loans available, you can move forward with applying for a home loan with confidence. To learn more and help find the right type of home loan for you, speak with a home lending advisor today to review your options.