If you have never been brought home before or never borrowed money from a financial institution, you might be unaware of the types of loans. There is more than one type of loan available to finance your purchase. All the loans have different rates of interest and installment amounts that make it convenient for the customers to buy a loan according to the situation.
These choices may look overwhelming at first when you do not know which type of loan will suit your requirement best. It will be easy to choose a residential loan once you learn about the types of loans. Listed below are a few common types of mortgage loans with their details for home buyers. Look at the necessary information and choose accordingly.
Types Of Loans To Buy A House
We have listed the most common types of loans available to buy a home. For each type of loan, you will see their details with advantages. So go through them carefully to make a wise decision.
A fixed-rate mortgage comes with a fixed interest rate; you can choose between 30 and 15 years. This type of mortgage locks in the interest rate for the duration of your loan. The one benefit of this loan is that your interest rate will remain the same even if it increases.
Best Buyers- Home buyers who want lower monthly payments. Also, for the buyers who want to repay the loan as soon as possible.
Commonly referred to as ARM, Adjustable-rate Mortgage keeps your interest rate the same in the initial years and then changes periodically. For Example: if you have 5/1 ARM, the interest rate will remain the same for the first five years, then change over time.
Best Buyers- Two types of home buyers are perfect for ARM: one who believes the rate of interest will lower in the future and the second who wants a short-term loan.
VA loans are government-backed mortgage guarantees by the US Department of Veteran Affairs, and it is mainly for military families. It comes with a lower interest rate than other loans, such as fixed-rate or confirming. The only essential things to purchase this loan are a 660 credit score and a 41% debt-to-income ratio. With this type of loan, you do not have to pay a down payment but a funding fee. The fee can be lowered if you pay a down payment.
Best Buyers- Military people who want low rates of interest and no down payments.
Government-backed mortgage backed by the US Department of Agriculture, USDA Mortgage is suitable for low-to-middle families willing to buy a house in rural or suburban areas. The quality criteria of this loan depend on where you currently live in the USA. The interest rate of the USDA mortgage is lower than a VA mortgage. The common credit score required for this type of loan is 640 and 41% debt-to-income ratio. You will have to pay for the insurance, but it should be less.
Best Buyers- Buyers with less income who want to buy a home in rural and suburban areas while paying zero down payment.
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Junbo is another type of conventional mortgage in which loan limits vary by county and adjust periodically. Buying a Jumbo loan is harder than other types of loans as its eligibility criteria are stricter than conforming loans. Each money lender has its own requirements for a jumbo mortgage. The primary requirement is a higher credit score and a lower debt-to-income ratio. This would have a bigger down payment than another type of mortgage, such as conforming.
Best Buyers– Buyers who want expensive houses and owners who want to refinance a jumbo-size mortgage.
Like USDA and VA, the FHA mortgage is also backed by the government and insured by the Federal Housing Administration. It requires a 580 or higher credit score with a 35% down payment or a 10% down payment with a 500 to 590 credit score. Most money lenders ask for a 43% or lower debt-to-income ratio to approve this type of loan. With this loan, you do not have to pay PMI, but you do have to pay different types of mortgage insurance.
Best Buyers- Buyers with low credit scores and a down payment of less than 20%.
Besides these, there are other types of loans, such as reserve conventional and conforming mortgages. Your choice should completely depend on your requirements and pocket. If you have any sort of confusion regarding any type of loan or have queries, comment in the below section.