Finding the right property is just half of the battle if you cannot purchase the property in cash. It would help if you decided which mortgage is right for you.
You will be paying your mortgage back for a long time, so it is important to locate a loan that suits your requirements and budget.
You enter into a legally binding agreement with a lender to repay the loan within a certain period.
There are many types of mortgages. The 30-year fixed-rate mortgage is the most used but is not the only option.
Lenders will ask about your income, credit history and what type of home you are looking to buy. The lenders will then use this information to recommend loan options that work for you.
The United States government is not a lender but guarantees certain types of loans that meet income requirements, loan limits, and geographical area requirements. Here is a list of all the types of mortgage loans that are available.
Conventional mortgages
Conventional loans are loans that the federal government does not guarantee. Borrowers with good credit and stable employment histories who can pay a 3% downpayment can often qualify for a conventional loan backed by Fannie Mae and Freddie Mac. These two government-sponsored entities buy and sell most conventional mortgages in the US.
- To avoid paying PMI (private mortgage insurance), borrowers typically require a 20% downpayment.
- Some lenders offer conventional loans with low down payments and no private mortgage insurance.
Conforming Mortgage Loans
Conforming loans have the maximum loan limits set by the federal government. These restrictions vary depending on where you live. In 2024, the Federal Housing Finance Agency raised the conforming loan limit for single-unit properties from $647,200 to $647,000.
The FHFA has a higher maximum loan limit in some parts of the country. Because home prices in high-cost areas are usually at least 115 per cent higher than the baseline loan limit, it has a higher maximum loan limit.
Nonconforming Mortgage Loans
Fannie Mae or Freddie Mac cannot sell or purchase non-conforming loans due to restrictions on loan amounts or underwriting guidelines. Jumbo loans are the most popular type of non-conforming loan.
Because the loan amounts are often higher than the conforming loan limits, they’re called jumbo loans.
These loans are riskier for lenders, so borrowers need extra cash, a 10%-20% down payment and excellent credit.
Federal Housing Administration (FHA), Government-Insured Loans
Low- and moderate-income buyers may not be eligible for conventional loans. Instead, they turn to Federal Housing Administration (FHA) loans. Borrowers may put down as low as 3.5 per cent on the home’s purchase price.
FHA loans have a lower credit score requirement than conventional loans. FHA loans are not backed by money. Instead, they guarantee loans made to FHA-approved lenders.
FHA loans come with one drawback. All borrowers must pay an annual and upfront mortgage insurance premium (MIP) for the duration of the loan. This is a type of mortgage insurance that protects lenders from default.
Government-Insured Veterans Affairs Loans
The US Department of Veterans Affairs (VA) guarantees home buyer loans for veterans and military personnel.
The entire amount of the loan can be financed by the borrower with no down payment. Other benefits include lower closing costs (which may be covered by the seller), higher interest rates and no PMI/MIP.
To offset the cost of VA loans, a funding fee is charged. It is a percentage of the loan amount. Your military service and the amount of the loan determine the funding fee. For the following service members, there is no funding fee:
- VA benefits are available to veterans suffering from a service-related disability
- Veterans who are disabled due to service would be eligible for VA compensation if they don’t have an active duty or retirement pay.
- Spouses of veterans who have died in service or had a disability-related to service are eligible for benefits.
- A service member who has a memorandum or proposed rating that identifies eligibility for compensation in the event of a pre-discharge case
Purple Heart recipient from the military
VA loans are a great option for active military personnel, veterans, and their spouses. They offer highly competitive terms and can be tailored to meet their financial needs.
USDA Loans (Government-Insured)
The United States Department of Agriculture (USDA) supports loans that help rural buyers with low incomes to own their homes. These loans are available to qualified borrowers if the properties meet USDA eligibility requirements.
USDA loans are the best option for rural homebuyers with low incomes and little savings for down payments but can’t qualify for conventional loans.
