If you’re like most Americans, buying a home means taking out a mortgage. Last year, 94% of all homebuyers relied on a mortgage to finance their new home.
The mortgage process can be overwhelming, especially when you’re starting out. With so many different types of mortgages—FHA, VA, USDA, ARMs, jumbo loans, etc.—they can all start to look alike.
Different mortgage loan programs offer different advantages to different home buyers. As a result, what might be right for you may not be suitable for the next borrower.
Before applying for a mortgage, understanding the different options each one comes with will help you make an informed decision.
Let’s look at the different types of home loans in detail.
A conventional mortgage is any home loan that isn’t guaranteed or backed by a federal government agency.
Government-backed loans include VA loans, FHA loans, and USDA home loans.
Borrowers who don’t qualify for one of the government-backed programs typically turn to conventional mortgages.
Conventional loan advantages
- A backup for those who can’t qualify for government-backed loans
- Better interest rates than other loan types, i.e., FHA loans
Conventional loan disadvantages
- Private mortgage insurance (PMI) required for less than 20% down payment
- Hard to qualify for with low credit
Conforming loans are mortgages that fall within the lending limits put in place by the Federal Housing Finance Agency (FHFA).
Conforming loans also follow additional rules established by the Federal National Mortgage Association—(aka Fannie Mae) and the Federal Home Loan Mortgage Corporation—(aka Freddie Mac).
Conforming loan advantages
- More manageable mortgage loan amount for some borrowers
- Lower interest rates compared to non-conforming loans
- Smaller down payment allowed
- Fair credit borrowers can still qualify
Conforming loan disadvantages
- Loan limits may not be enough in high-priced markets, such as Alaska, Hawai’i, Colorado, Los Angeles, etc.
- Hard to qualify for with high debt
When a mortgage doesn’t follow the Fannie Mae and Freddie Mac lending limits and isn’t backed by a government agency, it’s considered a non-conforming loan.
These types of home loans often allow lenders to be more flexible with eligibility requirements. These loans are also called “jumbo loans” or” jumbo conventional mortgages.”
Non-conforming loan advantages
- Limits can be higher than conforming limits
- Best for borrowers with solid finances interested in high-value, luxury, or unconventional properties
Non-conforming loan disadvantages
- Higher mortgage interest rates
- Bigger down payments compared to conforming loans
Government-backed mortgages offer a few types of home loans with no down payment, such as VA and USDA loans.
Backed by the Federal Housing Administration, FHA home loans help borrowers buy a home despite less than perfect credit or smaller down payments.
While FHA loans can carry higher interest rates than conventional mortgages, borrowers with a credit score as low as 500 can be approved.
Additionally, borrowers can qualify for an FHA Home Loan with a down payment of 3.5%.
Because of their low down payment options, many borrowers consider them the best type of home loan for first-time homebuyers.
VA loans (Department of Veterans Affairs) help eligible service members qualify for some of the lowest interest rates available.
In addition, VA loans offer a zero-down payment option, and VA guidelines allow borrowers with lower credit scores.
Lower-income Americans living in rural areas can qualify for zero-down payment mortgages through the USDA Home Loan program. Some borrowers may be required to pay mortgage insurance.
Government-backed mortgage advantages
- No-down-payment and zero-cash at closing options for eligible borrowers
- Easier eligibility requirements than conventional loans
Government-backed mortgage advantages
- Restricted to eligible service members and select surviving spouses.
- Lengthier closings, must undergo an inspection and meet the VA’s “minimum property requirements“
- Not as cost-effective for borrowers with larger down payments or good credit
Fixed Rate Mortgages
90% of recent American homebuyers chose the fixed-rate 30-year mortgage, making it the most popular type of home loan, according to Freddie Mac.
Fixed-rate mortgages offer a consistent mortgage rate for the lifetime of your mortgage—regardless of market activity.
Fixed-rate mortgage advantages
- Predictability with consistent mortgage payment amounts
Fixed-rate mortgages disadvantages
- Higher mortgage rates compared to adjustable-rate mortgages
Adjustable rate mortgages
Adjustable rate mortgages offer borrowers both a fixed and an adjusting rate.
Borrowers enjoy an initial fixed-rate period, during which time your mortgage interest rate remains the same, no matter what the markets may do. However, once the initial period is over, your interest rate can adjust based on market activity.
Adjustable rate mortgage advantages
- Lower mortgage rates compared to fixed-rate mortgages
- Monthly mortgage payments can be reduced when interest rates drop
Adjustable rate mortgage disadvantages
- Borrowers can’t predict how much mortgage interest rates might adjust
- Monthly payment can jump if interest rates increase
Get down payment assistance with Austin Capital Mortgage
If you’ve got a minimum credit score of 660 and are having trouble coming up with your down payment, Austin Capital Mortgage offers a down payment assistance program that can help. The program offers qualified buyers:
- No income limits required for the program
- Borrowers do NOT need to be a first time buyer
- Co signers ARE allowed
- Loan limit follows FHA guidelines
At Austin Capital Mortgage, we take the time to get to know your financial situation and work with you to understand your home buying goals and find the best financing options to help you reach them.
Reach out to the mortgage specialists at Austin Capital Mortgage today and learn more about how we can help you make buying a home a reality.