Choosing a home to buy is a new adventure, but it's not always easy. There are so many different types of home loans. Should you go with an FHA or a USDA loan? Do you qualify for an RD Loan (Rural Development Loan)?Fixed-rate or adjustable-rate? Understanding what each home loan is will help you know what kind of mortgage is right for you.
As a home buyer, you have the option to choose either a fixed-rate or an adjustable-rate mortgage.
A fixed-rate mortgage is the most common kind of mortgage. It consists of a single interest rate and, of course, a monthly payment. A fixed-rate mortgage can be for either 15 or 30 years.
The 15-year loan saves on interest and has a lower rate than a 30-year loan. The 30-year loan is the most common fixed-rate mortgage. It also has the lowest monthly payment.
Great for: homebuyers wanting stability with their payments and those wanting to stay in a home for a long period of time.
Adjustable-rate mortgages don't have a fixed interest rate for the life of the loan and depending on market changes, interest rates can go up or down.
For the first few years of an adjustable-rate mortgage, you will have a fixed interest rate. After those few years, the interest rate adjusts, as stated in the name. An example of this is the 5/1 adjustable-rate. It has a fixed rate for the first five years. After the five years is up, the interest rate changes each year until you pay off the loan.
Great for: homebuyers with lower credit scores who plan on paying off the loan in five years or less or buyers planning to move before the fixed period ends.
The government backs these types of home loans. These home loans don't need a large down payment, but they do require a monthly mortgage insurance premium. Each loan is insured by one of three government agencies: The Federal Housing Administration (FHA), The U.S. Department of Agriculture (USDA), and The U.S. Department of Veteran Affairs (VA).
This type of loan has the lowest credit score requirements. It also has a small down payment requirement. Down payment requirements depend on a person's FICO score. For example, a person with a 500 FICO score can qualify for a ten percent down payment. Those with 580 or higher FICO scores may even qualify for only 3.5% down.
Great for: first-time homebuyers with a lower credit score.
If you're a family looking to live in a rural area, then this loan might just be for you. To get a USDA loan, you must be in a USDA eligible area, have a certain amount of income, and have a credit score of 640 or higher. With this loan, you won't have to make a down payment and will have a discounted rate.
Great for: families looking to live in a rural area.
Last, but not least, you have the VA loan. This mortgage is specifically for veterans who served in at least one of three ways: 90 consecutive days during times of war, 180 consecutive days during times of peace, or at least six years in the reserves. With this kind of loan, you don't need to pay a down payment or mortgage insurance. There are strict requirements about which kind of home you buy.
Great for: qualifying veterans.
Another type of home loan are conventional loans. There are two different types of conventional loans, conforming and non-conforming.
Conforming loans are loans with amount limits set by Fannie Mae or Freddie Mac. To qualify for a conforming loan, you have to have a credit score of at least 620. The better the credit, the lower the interest rates will be for you.
Great for: homebuyers with good credit.
Non-conforming loans are not within the guidelines of Fannie Mae or Freddie Mac. Depending on the loan, the amount can reach up to $3 million. Because of how much is being loaned, a better credit score is required and a 15-20 percent down payment.
Great for: homebuyers purchasing a home above the loan limit amount set by Fannie Mae or Freddie Mac.
If you're in the market for a new home, take the time to learn about each kind and choose the one that works for you.