The Major Types of Mortgage Loans

Dec 1

Beginning your search for a new home can be a very exciting time, but sometimes the financial aspect of buying can seem a bit overwhelming. When buying a home, there are several different loan types available depending on what you're buying and where you're buying. A lender will always be your first line in answering any questions as to what type of loan will work the best for you, but here is a brief overview of the three main types of loans buyers choose when purchasing their new home.

Conventional Loan:
A conventional loan is backed by a private lender, such as a bank, and is generally available in two types of terms - a 15-year term or a 30-year term. A 15-year term will have higher monthly payments than a 30-year term but for the loan, you'll pay less in interest and therefore gain equity in your new home faster than you would a 30-year term. A conventional loan generally requires at least 3% down and anything under 20% down will require a monthly mortgage insurance payment to the lender. A single interest rate will be paid for the course of the entire loan and this percentage is determined at the origination of the loan.

FHA Loan:
FHA stands for the government administration it is insured by, the Federal Housing Administration. A conventional loan requires a credit score of at least 620 to qualify, whereas an FHA loan will consider a credit score of as low as 500 as well as a higher debt-to-income ratio. An FHA loan does have a lending cap dependent on the city where you're purchasing your home. An FHA loan requires lending insurance for the full term of the loan, which can be either a 15-year term or a 30-year term and this is regardless of the percentage of your down payment, which can be as low as 3.5%. An FHA loan will also require a separate inspection by an FHA-certified inspector, to ensure that the home is clear of structural issues, and hazards, and is in otherwise good liveable condition. If you plan to buy a fixer-upper, this may not be the best route for you.

VA Loan:
A VA or Veterans Affairs loan is a type of loan that is available only to active and veteran service personnel or some family members. This loan is only available for use on a primary residence, and only one VA loan is allowed per qualifying person at any point in time. A VA loan requires no down payment to purchase, no mortgage insurance regardless of down payment, and also carries with it lower closing costs than other available loans. Similar to an FHA loan, since a VA loan is insured by the government, it carries with it a separate inspection to ensure that the home is in good livable condition.

Other loans that may come into play depending on your budget or purchase location are: