1. Conventional mortgages
A conventional mortgage is a
home loan that’s not insured by the federal government. There are two types of
conventional loans: conforming and non-conforming loans. A conforming loan
simply means the loan amount falls within maximum limits set by Fannie Mae or
Freddie Mac, government agencies that back most U.S. mortgages. On the other
hand, loans that don’t meet these guidelines are considered non-conforming
loans. Jumbo loans are the most common type of non-conforming loan.
Generally, lenders require
you to pay private mortgage insurance on many conventional loans when
you put down less than 20 percent of the home’s purchase price.
- Can be used for a primary home, second home or investment
- Overall borrowing costs tend to be lower than other types of
mortgages, even if interest rates are slightly higher.
- You can ask your lender to cancel PMI once you’ve gained 20
- You can pay as little as 3 percent down for loans backed by Fannie
Mae or Freddie Mac.
- Minimum FICO score of 620 or higher is required.
- You must have a debt-to-income ratio of 45 to 50 percent.
- Likely must pay PMI if your down payment is less than 20 percent
of the sales price.
- Significant documentation required to verify income, assets, down
payment and employment.
Who should get
Conventional loans are ideal
for borrowers with strong credit, a stable income and employment history, and a
down payment of at least 3 percent.
2. Jumbo mortgages
mortgages are conventional loans that have non-conforming loan limits. This
means the home prices exceed federal loan limits. For 2018, the maximum
conforming loan limit for single-family homes in most of the U.S. is $453,100,
according to the Federal Housing Finance Agency. In certain high-cost areas,
the price ceiling is $679,650. Jumbo loans are more common in higher-cost areas
and generally require more in-depth documentation to qualify.
Pros of jumbo mortgages
- You can borrow more money
to buy a home in an expensive area.
- Interest rates tend to be
competitive with other conventional loans.
Cons of jumbo mortgages
- Down payment of at least 10
to 20 percent is needed.
- A FICO score of 700 or
higher typically is required, although some lenders will accept a minimum
score of 660.
- You cannot have a
debt-to-income ratio above 45 percent.
- Must show you have
significant assets (10 percent of the loan amount) in cash or savings
Who should get one?
loans make sense for more affluent buyers purchasing a high-end home. Jumbo
borrowers should have good to excellent credit, high incomes and a substantial
down payment. Many reputable lenders offer jumbo loans at competitive rates.
3. Government-insured mortgages
U.S. government isn’t a mortgage lender, but it does play a role in helping
more Americans become homeowners. Three government agencies back loans: the
Federal Housing Administration (FHA loans), the U.S. Department of Agriculture
(USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
FHA loans: Backed by the FHA,
these loans help make homeownership possible for borrowers who don’t have a
large down payment saved up and don’t have pristine credit. Borrowers need a
minimum FICO score of 580 to get FHA’s maximum 3.5 percent financing. However,
a credit score of 500 is accepted with at least 10 percent down. FHA loans
require two mortgage insurance premiums: one is paid upfront, and the other is
paid annually for the life of the loan if you put less than 10 percent down.
This can increase the overall cost of your mortgage.
more about what makes FHA loans so popular among mortgage borrowers.
VA loans: VA
loans provide flexible, low-interest mortgages for members of the U.S. military
(active duty and veterans) and their families. VA loans do not require
a down payment or PMI, and closing costs are generally capped and may be paid
by the seller. A funding fee is charged on VA loans as a percentage of the loan
amount to help offset the program’s cost to taxpayers. This fee, as well as
other closing costs, can be rolled into most VA loans or paid upfront at
USDA loans: USDA
loans help moderate- to low-income borrowers buy homes in rural areas. You must
purchase a home in a USDA-eligible area and meet certain income
limits to qualify. Some USDA loans do not require a down payment for eligible
borrowers with low incomes.
Pros of government-insured
- They help you finance a
home when you don’t qualify for a conventional loan.
- Credit requirements are
- You don’t need a large down
- They’re open to repeat and
Cons of government-insured
- Expect to pay mandatory
mortgage insurance premiums that cannot be canceled on some loans.
- You’ll have higher overall
- Expect to provide more
documentation, depending on the loan type, to prove eligibility.
Who should get one?
loans are ideal if you have low cash savings, less-than-stellar credit and
can’t qualify for a conventional loan. VA loans tend to offer the best terms
and most flexibility compared to other loan types for military borrowers.
4. Fixed-rate mortgages
mortgages keep the same interest rate over the life of your loan, which
means your monthly mortgage payment always stay the same. Fixed loans typically
come in terms of 15 years, 20 years or 30 years.
Pros of fixed-rate
- Your monthly principal and
interest payments stay the same throughout the life of the loan.
- You can more precisely
budget other expenses month to month.
Cons of fixed-rate
- You’ll generally pay more
interest with a longer-term, fixed-rate loan.
- It takes longer to build
equity in your home.
- Interest rates typically
are higher than rates on adjustable-rate mortgages.
Who should get one?
plan to stay in your home for at least seven to 10 years, a fixed-rate mortgage
offers stability with your monthly payments.
5. Adjustable-rate mortgages
the stability of fixed-rate loans, adjustable-rate mortgages (ARMs)
have fluctuating interest rates that can go up or down with market conditions.
Many ARM products have a fixed interest rate for a few years before the loan
resets to a variable interest rate for the remainder of the term. Look for an
ARM that caps how much your interest rate or monthly mortgage rate can increase
so you don’t wind up in financial trouble when the loan resets.
Pros of adjustable-rate
- You’ll enjoy a lower fixed
rate in the first few years of homeownership.
- You’ll save a substantial
amount of money on interest payments.
Cons of adjustable-rate
- Your monthly mortgage
payments could become unaffordable, resulting in a loan default.
- Home values may fall in a
few years, making it harder to refinance or sell your home before the loan
Who should get one?
must be comfortable with a certain level of risk before getting an ARM. If you
don’t plan to stay in your home beyond a few years, an ARM could save you big
on interest payments.