Finding the right property is only half the battle unless you can buy it entirely in cash. The other half is determining which mortgage is best for you.
Because you’ll be repaying your mortgage over a long period of time, it’s critical to find a loan that meets your needs and fits within your budget.
When you borrow money from a lender, you’re entering into a legally binding agreement to repay the loan over a specified period of time.
Mortgages come in a variety of shapes and sizes. While the 30-year fixed-rate mortgage is the most common, it is by no means your only option.
Your lenders will inquire about your income, credit history, and the type of home you want to purchase. They’ll then use that information to suggest loan options that are right for you.
Although the United States government is not a lender, it does guarantee certain types of loans that meet strict income, loan limit, and geographic area requirements. Here’s a rundown of the various types of mortgage loans available.
A loan that is not backed by the federal government is known as a conventional loan. Borrowers with good credit, stable employment and income histories, and the ability to put down a 3% down payment can usually qualify for a conventional loan backed by Fannie Mae or Freddie Mac, two government-sponsored enterprises that buy and sell the majority of conventional mortgages in the US.
Borrowers typically need a 20% down payment to avoid having to pay private mortgage insurance (PMI).
Conventional loans with low down payments and no private mortgage insurance are also available from some lenders.
Conforming Mortgage Loans
Maximum loan limits set by the federal government apply to conforming loans. These restrictions differ depending on where you live. The Federal Housing Finance Agency increased the baseline conforming loan limit (CLL) for one-unit properties to $647,200 in 2022.
In some areas of the country, however, the FHFA sets a higher maximum loan limit. This is because home prices in these high-cost areas are at least 115 percent higher than the baseline loan limit.
Nonconforming Mortgage Loans
Due to the loan amount or underwriting guidelines, Fannie Mae and Freddie Mac are unable to sell or buy nonconforming loans. The most common type of nonconforming loan is jumbo loans.
Due to the loan amounts typically exceed conforming loan limits, they’re referred to as jumbo loans.
Because these loans are riskier for a lender, borrowers must typically have more cash on hand, make a 10% to 20% down payment, and have excellent credit.
Government-Insured Federal Housing Administration (FHA) Loans
When low- to moderate-income buyers can’t qualify for a conventional loan, they often turn to loans insured by the Federal Housing Administration (FHA). Borrowers can put down as little as 3.5 percent of the purchase price on their home.
The credit score requirements for FHA loans are less stringent than those for conventional loans. The FHA, on the other hand, does not lend money directly; instead, it guarantees loans made by FHA-approved lenders.
FHA loans have one disadvantage. For the life of the loan, all borrowers pay an upfront and annual mortgage insurance premium (MIP), which is a type of mortgage insurance that protects the lender from borrower default.
Government-Insured Veterans Affairs (VA) Loans
Homebuyer loans are guaranteed by the US Department of Veterans Affairs (VA) for qualified military service members, veterans, and their spouses.
Borrowers can finance the entire loan amount with no down payment required. Other advantages include lower closing costs (which the seller may cover), better interest rates, and no PMI or MIP.
A funding fee, which is a percentage of the loan amount, is required for VA loans to help offset the cost to taxpayers. The funding fee is determined by your military service category and the amount of your loan. The funding fee is waived for the following service members:
- Veterans receiving VA benefits for a service-related disability
- Veterans who would be entitled to VA compensation for a service-related disability if they didn’t receive retirement or active duty pay
- Surviving spouses of veterans who died in service or from a service-related disability
- A service member with a proposed or memorandum rating stating eligibility for compensation due to a pre-discharge claim
- A service member who received the Purple Heart
VA loans are ideal for active military personnel and veterans, as well as their spouses, who want highly competitive terms and a mortgage product that is tailored to their specific financial needs.
Government-Insured U.S. Department of Agriculture (USDA) Loans
The United States Department of Agriculture (USDA) backs loans to help low-income buyers in rural areas achieve homeownership. As long as properties meet the USDA’s eligibility rules, these loans require little to no money down for qualified borrowers.
USDA loans are best for homebuyers in eligible rural areas who have low household incomes, little money set aside for a down payment, and can’t otherwise qualify for a conventional loan.