3 Types of Mortgages to Finance Your Home
When you go shopping for a mortgage, it’s easy to get overwhelmed by all of the choices. But the basics of home loans are actually simple.
There are three major types of home loans. Here’s what you need to know about them.
- Conventional Loans
A conventional loan is not insured or guaranteed by the federal government. Typically, it’s a fixed-rate mortgage, meaning that the interest rate does not change.
Conventional loans can be difficult to qualify for. They have stringent requirements regarding income amount, credit score and down payment.
Despite these tough criteria, conventional loans are generally lower-cost than other types of guaranteed mortgages.
There are two sizes of conventional loans: conforming and non-conforming.
Conforming loans have a maximum allowable limit, currently $417,000 for a single-family home.
Nonconforming loans (sometimes called “jumbo loans”) exceed those limits. The eligibility requirements are often more strict than conforming loans. Interest rates are usually higher for jumbo loans.
- FHA Loans
FHA (Federal Housing Administration) loans are easier to qualify for than a conventional loan. They have lower upfront loan costs, more relaxed credit requirements, and lower down payment requirements (as low as 3.5%).
For these reasons, FHA loans are popular among first-time home buyers.
- VA Loans
The U.S. Department of Veterans Affairs (VA) does not directly issue loans, but instead guarantees mortgages offered by qualified lenders.
Qualifying for a VA loan is easier than a conventional loan, and it often requires no down payment.
In order to take out a VA loan, you must first contact the VA and apply for a certificate of eligibility.
Creative Ways to Help Finance Your Home
No matter what type of mortgage you take on, you’ll still need to make the down payment and cover other costs. Here are several creative ways to maximize your financial resources:
- Sell something: a second car, a boat, or a collection of antiques. Even small-ticket items can add up if you sell enough.
- Take on a part-time job or start a side business.
- Stick to a written budget, cut out all unnecessary expenses and pile up cash.
- Ask family members for help with financing.
- Raise money on a peer-to-peer loan website.
- Borrow against the equity in another property.
When in Doubt, Ask an Expert
Beyond the basic types of home loans, mortgages quickly become complicated. To save time and money (not to mention your sanity), consider working with a mortgage broker.
Mortgage brokers don’t lend directly to you. Instead, they help you find the best financing to suit your needs. A good mortgage broker will answer your questions and give you options.
Shop Around for Your Mortgage
Generally speaking, the higher your income, the larger your down payment, and the better your credit score, the easier it will be to get a mortgage.
Whether you use a broker or go it alone, be sure to shop around. Compare your different mortgage options until you find the right home loan for you.