Many homebuyers require the assistance of financing when purchasing a home. There are a variety of options available to homebuyers. Following are the different types of loans available in 2016.
Fixed versus Adjustable Rate loan options
When borrowing one of the first choices to make about the type of mortgage loan you want, will be deciding whether you want a fixed or adjustable rate. Fixed rate mortgage loans have the same interest rate for the entire term of the loan. This means that your monthly payment will stay the same every month. While adjustable rate mortgage loans (ARMs) have an interest rate that changes or adjusts through the life of the loan. This means that your monthly payments could vary. Typically, the rate on an ARM changes every year after the initial fixed period. For a side-by-side comparison please visit the Home Buying Institute’s website.
Government Insured versus Conventional loan options
After choosing a fixed or adjustable rate mortgage, you will need to decide if you want to use as government-insured home loan or a conventional, regular type of loan. A conventional home loan has zero governmental guarantee or insurance. The lender and borrower assume all responsibility for any losses that result from borrower default. Following are three government-backed mortgage loans:
- FHA loans
The Federal Housing Administration (FHA) mortgage insurance program is available to first-time and all other types of borrowers. Managed by the Department of Housing and Urban Development (HUD), the government insure the lender against losses resulting from borrower default. One benefit this program provides borrowers is that it allows them to make a down payment as low as 3.5 percent while conventional loans require a minimum of 5 percent. One con to this loan is that the borrower must pay for mortgage insurance which ultimately increase the monthly payment.
- VA loans
The U.S. Department of Veterans Affairs (VA) provides military service members and their families with a loan program that is similar to the FHA program. This means that the VA will reimburse the lender for any losses resulting from borrower default. The most important benefit of the VA program is that the borrowers can receive 100 percent financing requiring no down payment.
- USDA/RHS loans
The United States Department of Agriculture (USDA) offers rural borrowers a loan program providing they meet certain income requirements. The Rural Housing Service (RHS) manages the program. Rural residents that have a steady and low or moderate income, but can’t obtain adequate housing through conventional financing qualify for this program. Their income must not be higher than 115 percent of the adjusted area median income (AMI). AMI’s vary by county.
Jumbo versus Conforming loan options
Another distinction about the types of loans is made based off the size of the loan. A conforming loan meets the underwriting guidelines set by Fannie Mae or Freddie Mac. These two government-controlled corporations purchase and sell mortgage-backed securities (MBS). While a jumbo loan exceeds the pre-established criteria established by Fannie and Freddie. Typically, this type of mortgage presents a higher risk for the lender. As a result, borrowers must have excellent credit and larger down payments. Interest rates are usually higher with jumbo loans versus conforming loans as well.