Potential home buyers are always in search for better loans and lower rates: no wonder, as the mortgage loans are usually the loans of a lifetime, so the approach to choosing a lender and the terms of a loan must be as thorough as possible.
Mortgage loans allow borrowers to buy expensive residential or commercial property without paying the entire cost upfront.
There are dozens of types of loans and each one has its own specifics, benefits, and disadvantages. Mortgage loans stand out of the crowd as it could be considered not only as a way for buying a home to live in but also as an investment tool. Many mortgage holders buy a Real Estate with investment purposes – to rent the property out and get an income which exceeds monthly mortgage payments.
Historically, mortgages are the loans with the lowest rates (in the US particularly) as home loans are normally granted for the period of 25-30 years.
After the Personal and Student’s loans, a mortgage is a most common type of loans Americans apply for. Banks and non-bank lenders have certain qualifying requirements to potential borrowers. Such requirements include an official confirmed income, good credit score, and collateral to insure the loan and an initial amount of money to pay the first part of the property’s cost (a down payment).
Here are the types of mortgage loans available in the USA:
Fixed rate mortgages
Fixed rate mortgage implies you will have to make monthly repayments with the same exact rate during the entire period of your loan. If you have a 25-years mortgage loan with the fixed rate, your monthly budgeting and planning are easy and simple. The advantages of a fixed rate mortgage are obvious, but there is one disadvantage: you will have to pay (usually about 1% above the rate) for having this comfort and reliability.
Fixed rate terms protect you from the circumstances where the lender would decide to raise the rate due to variety reasons: financial crisis, high inflation rate, etc.
Adjustable rate mortgages
Adjustable mortgage rate means the rate may change during the life of a loan. The rate is calculated, based on the various financial indexes, therefore, the rate will change following the change of one or several basic indexes.
This could be both beneficial and risky. If the basic index goes down, your mortgage rate decreases too (which is good), but when the index goes up, you will have to pay higher interest and you never know how high the index may potentially jump.
There is another type of risk conditioned by adjustable rate. If you buy a property with the purpose to rent it out and then the market prices drop, your interest rate will rise (as your property used as collateral became cheaper), while your monthly income, received from tenants, will drop.
Conventional mortgage loans
These are the loans which are not backed nor insured by the government, means you totally rely on the bank and its terms. You receive the mortgage only in case of matching bank’s requirements for your professional qualification, credit history, monthly income (some additional papers may be required as well).
Banks (and non-bank lenders) usually have an online calculator at their websites, so you may calculate the amount of your monthly repayment, according to the sum of the loan and the rate which certain bank offers.
Conventional mortgage loans may be conforming or non-conforming (see the detailed description below).
Government-insured mortgage loans
These are the loans (not only mortgages but any type of a loan) which are backed by the government. That means if the borrower fails to make loan repayment, the lender is insured by the government and gets repaid by the government whatever the terms and amount of the loan.
Logically, the less risk the lender takes, the softer the requirements to the potential borrower. This may attract borrowers whose credit score and qualification are not high enough for the conventional loans.
Here are the types of government-insured loans available in the USA:
FHA loans are the loans which are backed (insured) by the Federal Housing Administration. Such loans could be granted only by lenders (whether banks or non-bank lenders) which has been qualified by the Government for lending money for mortgages.
FHA loans are purposed to be granted to low-income borrowers who don’t have enough money to make a full-size down payment. FHA loans also allow banks grant housing loans for borrowers with relatively bad credit score (500-600). Because the loans are backed by the government, the lender doesn’t take the risk even with the low-scored borrowers.
VA loans stand for Veteran Affairs Department, established by the US government, to let veterans find proper funding for house purchasing.
This is a unique type of a loan, where the government offers 100% funding for veterans and their families who apply for a mortgage. That means even with the zero down payment, a borrower may receive the mortgage loаn with the very special terms.
UDSA loans stand for United States Department of Agriculture and granted to those individuals who are willing to buy a residential property in a rural area.
USDA loan has several specific features which differentiate it from other types of loans.
First of all, USDA loans are designed especially for borrowers and their families with the summarized income below average.
The borrowers who apply for USDA loan must meet a set of requirements, such as choosing a home approved by the USDA and willingness to take a 30-years loan. One of the most important requirements to potential borrowers is relatively high credit score (above 640).
The term “Conforming loans” is often used when they speak about conventional loans. Conforming are the loans which meet the criteria of special authorities like Federal Housing Administration. The amount of money, granted under the terms of conforming loan does not exceed limits set by the organization. If the criteria of the loan fail to meet the qualification requirement, such loan is defined as non-conforming one.
Jumbo mortgage loans 120
Jumbo mortgage loans are the loans which are considerably larger than the loans normally granted for buying a residential property.
Sometimes, even relatively small houses cost unreasonably much just because of the location at the high-cost areas, so the borrower applies for a jumbo mortgage loan.
Some lenders set higher qualification requirements to borrowers applying for the jumbo loans. Needless to say but your credit score must be high as well as the bank takes a bigger risks lending you a bigger loan.