The most common type of mortgage is a conventional mortgage. This is a good choice for borrowers with good credit scores because borrowers who place a larger down payment can benefit from lower interest fees. Conventional loans can apply to primary homes, secondary homes, or investment properties. Some benefits of using a conventional mortgage include lower overall borrowing costs compared to other types of mortgages and a minimum down payment of 3%. However, conventional loans do have more strict requirements on the borrower’s credit score, requiring at least a score of 620 to qualify. The borrower’s debt-to-income ratio (DTI) is also carefully considered during the conventional loan qualification process. In addition to these requirements, the borrower must pay for private mortgage insurance (PMI) if the down payment is less than 20%. Overall, a conventional mortgage is best suitable for borrowers with strong credit scores and stable incomes.
A fixed-rate mortgage has the same interest rate and principal payment for the entire life of the loan. Though the borrower’s total payment may change based on property taxes and insurance rates, fixed-rate mortgages provide steady monthly payment expectations for borrowers. Fixed-rate mortgages provide the most benefits to long-term homeowners who have decided to purchase their forever home since the loans are typically offered in 15-year or 30-year terms. The fixed interest rate allows the homeowners to budget for long-term expenses, offering peace of mind when entering into a large investment like purchasing a home. However, the downside of fixed-rate mortgages is that borrowers may end up paying more interest in the long run if the time the loan was secured was when fixed rates were high.
Adjustable-rate mortgages are the opposite of fixed-rate mortgages since the borrower’s interest rates fluctuate based on the current market rates. These types of loans use a 30-year term with an introductory period of fixed interest that can range from 5, 7, or 10 years. After this period of fixed interest, the interest rate then changes based on the market and rate caps, which protect borrowers from rapidly rising rates. Adjustable-rate mortgages may be a good choice for homebuyers who plan to buy a short-term “starter home” before finding their forever home due to the lower interest rates during the introductory period. A negative, however, is that borrowers may spend more money if they decide to remain at the home for the full term of the mortgage since the interest rates are determined by changes in the market.
Government-insured loans are loans that are insured by government agencies, which include the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA). FHA loans allow borrowers to become homeowners without placing a large down payment or having a perfect credit score. Requirements include supplying either a minimum credit score of 580 with a 3.5% down payment, or a minimum credit score of 500 with a 10% down payment. VA loans provide low-interest mortgages for U.S. military members, including active duty, veterans, and their families without requiring a minimum credit score or downpayment. VA insured loans do, however, charge a percentage of the loan amount as a funding fee. USDA loans help borrowers with lower incomes become homeowners in rural areas. Requirements include purchasing a USDA-eligible area and meet specified income requirements which can determine whether the borrower must place a down payment. Government-insured loans allow borrowers who do not qualify for conventional loans to purchase homes without requiring a high credit score and hefty down payment.
Jumbo loans are loans that exceed the Federal Financing Housing Agency (FHFA) conforming loan limit and are most commonly used in high-cost areas. Borrowers who are seeking to finance a large sum of money for a high-value home or property investment will opt for using this loan. The amount borrowed must be above $548,250 (or larger according to the latest loan limit), and the borrower must have a credit score of 700 or higher to qualify. The borrower must also present significant assets in cash or savings, show a low DTI ratio, and be able to place a down payment of 10-20%. Because the qualification process is much stricter on jumbo loans, it can be difficult for borrowers to secure.
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