Mortgage Loan Types: How to Make the Right Choice
Choosing a loan can be difficult. With so many programs and options, knowing which one is right for your needs is confusing, overwhelming you to the point of frustration. But there is a right loan for you.
While every person has unique needs, different types of mortgage loans have specific advantages and disadvantages. Understanding these details is essential to the buying process.
Which type of mortgage loan is right for you? Let’s look at a few of the most common loan options so you can make the right choice for your future…
What Type of Mortgage Loans is Right For Me?
This is simply a mortgage loan that is not guaranteed, insured, or supported in any way by a government institution. Conventional loans are very popular, and roughly half of them are considered “conforming loans,” meaning they conform to the standards set by Fannie Mae and Freddie Mac. Conventional loans can be sold to Fannie Mae or Freddie Mac on the secondary market, or they can be held by the lender and remain what’s known as a “portfolio loan,” meaning they stay in the lender’s financial portfolio.
Why Choose a Conventional Loan
Conventional loans have a few specific advantages, but overall you’ll find that they are generally more flexible and accessible. Government-backed loans have specific guidelines for credit scores, down payments, debt-to-income ratios, and many other factors. In some cases, you may not qualify for a non-conventional loan, such as an FHA loan, but you could qualify for a conventional loan. Almost all lenders you work with will provide conventional loans, which can’t be said for other options, and you may have fewer closing steps, as the approval process can be easier.
The name might be a little deceiving, but FHA loans are insured by the Federal Housing Administration (FHA). The FHA, which is part of the Department of Housing and Urban Development, does not loan money, but simply provides insurance to lenders for loans that conform to their requirements. By providing insurance, they reduce risk to lenders, which makes lenders more willing to provide loans.
Why Choose an FHA Loan?
FHA loans are likely a good choice for your mortgage if you have a low credit score and can bring a down payment to the bargaining table. FHA loans have a tiered system; if you have a FICO score of 580 or higher, you can get a mortgage loan with only 3.5% down. If your score is between 579 and 500, you can get an FHA loan, but you’ll need at least a 10% down payment. So if your credit score is low but you have savings for a down payment, an FHA loan may be ideal.
VA loans are administered by private lenders, but they have the financial support of the Department of Veterans Affairs. To qualify, you need to be an eligible service member or veteran of the United States Armed Forces, including the Army, Navy, Air Force, Marines, Coast Guard, and other service areas, such as the Reserves. Some spouses and family members are also eligible. Not all members qualify, so you’ll have to check eligibility requirements.
Why Choose a VA Loan
If you are a service member or veteran, you can get a mortgage loan with some of the best possible terms and requirements. For example, a 100% financing loan is available through VA loans. They can be acquired with no down payment, and it’s possible to have part of your closing costs covered by venders. There can be no insurance premiums, and the VA offers free financial counseling. You can also refinance your VA loan in the future without having to go through the qualifying process all over again, which could be extremely beneficial in the future.
Intended to bolster and improve rural and suburban areas, USDA loans are no-down-payment loans that are available to buyers who meet income restrictions and other requirements. The most important factor for these loans is that the home you are purchasing must be in a qualifying area. That doesn’t necessarily mean out in a remote area, as many small towns and suburban areas are available for USDA loans.
Why Choose a USDA Loan
If you want to buy a home in a rural or suburban area, and you need 100% financing for the loan, a USDA could be the best choice. Having 100% financing is beneficial if you are struggling to generate a down payment. These loans also come with no insurance premiums, as the USDA is trying to make rural homeownership as attractive and affordable as possible.
These are the big dogs of the mortgage lending industry. If a loan exceeds the amounts allowed for loans backed by government-supported institutions, specifically Fannie Mae and Freddie Mac, it is considered a “jumbo loan.” Limits are different for each county, so a jumbo loan in one area may not be “jumbo” in the next. For example a loan of $475,000 for a home in San Diego County is not considered a jumbo loan, but the same loan in Riverside County would be a jumbo, as the limit is $453,100. Jumbo loans are not supported by government-provided insurance or guarantees, so they create a higher risk to lenders. For this reason, they often come with strict requirements for credit, savings, debt-to-income ratios, and down payments.
Why Choose a Jumbo Loan?
Choose a jumbo loan when you need a large amount for your home purchase. If you have a strong credit score, a good down payment, and solid financial reserves, a jumbo loan could be an ideal choice. These loans allow you to make larger purchases on homes that are worth millions of dollars, which are certainly common in areas like San Diego.
Get Expert Advice to Sort Through All the Mortgage Loan Types
Whether you are looking for a jumbo loan or a 0%-down USDA loan, the team at San Diego Purchase Loans will make sure you have the right information to make a smart decision.
Contact us today and let us help you get the right loan for your specific needs!