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What Are the Different Mortgage Loan Types and Terms?

What Are the Different Mortgage Loan Types and Terms?

When buying a home, understanding the different mortgage loan types and terms is crucial. The right mortgage can save you thousands, while the wrong one could be a costly mistake. In this guide, Scott Coldwell and his mortgage loan team breaks down the main mortgage options, along with examples based on a $350,000 home purchase price.

Read our Mortgage Loan Process Guide for an in-depth look at mortgage loans

Key Takeaways:

  • Consider your down payment, credit, and future plans when choosing a loan
  • Conventional and VA offer advantages for eligible buyers
  • Fixed-rate loans provide long-term stability but higher initial rates
  • ARMs have low initial rates but carry interest rate risk

What Are Conventional Loans?

Conventional loans are mortgages that are not insured or guaranteed by the government. They are originated and backed by private lenders like banks, credit unions, and mortgage companies. 

Here are the key points about conventional loans:

  • They are the most common type of mortgage loan for home purchases.
  • Conventional loans can be conforming or non-conforming. Conforming loans meet the guidelines set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy and securitize mortgages.
  • Conforming conventional loans have loan limits that vary by county, with a maximum of $766,550 in most areas and up to $1,149,825 in high-cost areas.
  • Non-conforming conventional loans exceed the conforming loan limits and include jumbo loans (over $1-2 million) and other non-standard loans.
  • Conventional loans typically require a minimum credit score of 620 and a down payment of at least 3%, though 20% down avoids private mortgage insurance.
  • They offer more flexibility than government-backed loans like FHA, VA, and USDA in terms of property types, loan amounts, and income/credit requirements.
  • Conventional loans can have fixed or adjustable interest rates and various repayment terms like 15-year, 20-year, or 30-year mortgages.

Conventional loans follow guidelines set by Fannie Mae and Freddie Mac. They require a minimum 620 credit score and 3% down payment.

Conventional Loan For a $350,000 home:
  • 3% down = $10,500 down payment 
  • 4.5% interest rate
  • $1,773 estimated monthly payment (principal, interest, taxes, insurance)

Conventional loans avoid mortgage insurance with 20% down ($70,000) and offer lower rates than FHA/VA loans for buyers with good credit.  Again, these loans are originated in the private lending market without government insurance, offering more options but generally stricter requirements compared to government mortgage programs.

What Are FHA Loans? 

An FHA loan is a type of mortgage insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans are designed to make homeownership more accessible, especially for first-time and low-to-moderate income homebuyers. They allow for lower minimum down payments and credit score requirements compared to conventional loans.

What are FHA Loan Down Payment and Credit Score Requirements?

  • FHA loans require a minimum 3.5% down payment for borrowers with a credit score of 580 or higher.
  • Borrowers with credit scores between 500-579 can still qualify but must put down at least 10%.
  • The down payment can come from personal savings, gifts from family, or down payment assistance programs.
  • 2024 FHA Loan Requirements

What are FHA Loan Limits?

FHA loans have loan limits that vary by county and are set at 115% of the median home price in that area. In 2023, the FHA loan limit floor is $472,030 for low-cost areas and the ceiling is $1,089,300 for high-cost areas, with higher limits for special exception areas.

What are FHA Loan Property Requirements?

The property must be the borrower’s primary residence and meet FHA minimum property standards for safety, security, and soundness. Eligible properties include single-family homes, multi-unit properties up to 4 units, approved condos, and certain manufactured homes.

What is FHA Loan Mortgage Insurance?

  • FHA borrowers are required to pay an upfront mortgage insurance premium (MIP) and annual MIP, regardless of down payment amount.
  • The MIP protects the lender if the borrower defaults on the loan.

FHA loans allow lower down payments and credit score requirements but require mortgage insurance premiums. They are designed to provide an affordable path to homeownership.  FHA (Federal Housing Administration) loans are popular with first-time homebuyers due to low 3.5% down payment requirements and 500 minimum credit scores. 

FHA Loan for a $350,000 home:
  • 3.5% down = $12,250
  • 4.75% interest rate 
  • $238/month mortgage insurance
  • $1,908 total estimated monthly payment

The low down payment is an advantage, but mortgage insurance adds long-term costs.

What Are VA Loans?

A VA loan is a mortgage loan program backed by the U.S. Department of Veterans Affairs (VA) that provides affordable homeownership opportunities for eligible military members, veterans, and surviving spouses. 

Here are the key details about VA loans:

Who is Eligible for a VA Loan?

To be eligible for a VA loan, you must meet service requirements and obtain a VA Certificate of Eligibility. Eligible borrowers include:

  • Active duty military members
  • Veterans
  • Reservists/National Guard members
  • Surviving spouses of those who died while serving or from a service-related disability

What are the Benefits of VA Loans?

  • VA loans offer several advantages compared to conventional mortgages, including:
  • No down payment required in most cases, allowing for 100% financing.
  • Competitive and typically lower interest rates than conventional loans.
  • No private mortgage insurance (PMI) required, saving borrowers money.
  • More flexible credit and income requirements.
  • Ability to refinance up to 120% of the home’s value with some VA refinance loans.
  • Limits on closing costs allowed to be charged.

What are the VA Loan Types?

The VA offers several types of home loans, such as:

  • Purchase Loans: For buying a primary residence like a single-family home, condo, or multi-unit property.
  • Cash-Out Refinance: Allows taking cash out of your home’s equity.
  • Interest Rate Reduction Refinance Loan (IRRRL): Streamlined refinance to lower your interest rate on an existing VA loan.
  • Native American Direct Loan: For financing homes on Federal Trust Lands.

What is a VA Funding Fee?

Most VA loans require an upfront VA funding fee, a percentage of the loan amount that helps fund the program. The fee amount varies based on your down payment, military category, and whether it’s your first VA loan.

VA loans provide flexible, low-cost financing options designed to make homeownership more accessible for eligible servicemembers, veterans, and their families by reducing upfront costs and offering favorable terms.

For military borrowers, VA loans require 0% down payment and no mortgage insurance. This is an incredible benefit, but you must meet service requirements.

VA Loan for a $350,000 home:
  • $0 down payment
  • 4.25% interest rate 
  • $1,712 estimated monthly payment

The zero down is hard to beat, making VA loans excellent for eligible borrowers.

What are Jumbo Loans?

Jumbo loans are mortgages that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA) for Fannie Mae and Freddie Mac. Here are the key points about jumbo loans based on the provided search results:

What Exactly is a Jumbo Loan?

A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the loan limits set by the FHFA and cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. For 2024, the conforming loan limit is $766,550 for a single-family home in most areas, and $1,149,825 in high-cost areas like Hawaii and Alaska. Any mortgage amount above these limits is considered a jumbo loan.

What are Jumbo Loan Requirements?

  • Jumbo loans have stricter requirements compared to conforming loans due to the higher risk for lenders.
  • Borrowers typically need a higher credit score, often 700 or above, and a lower debt-to-income ratio, usually below 36%.
  • Larger down payments are required, generally 10-30% of the purchase price.
  • Lenders may require significant cash reserves, such as 6-12 months’ worth of mortgage payments.
  • Two home appraisals are commonly required instead of one.

What are Jumbo Loan Interest Rates and Costs?

Interest rates on jumbo loans used to be higher than conforming loans, but the gap has narrowed in recent years and jumbo rates can sometimes be lower. These types of loans may have higher closing costs and fees compared to conforming loans. Jumbo loans allow borrowers to finance higher-priced properties that exceed the conforming loan limits set by the FHFA, but they come with more stringent credit, income, asset, and down payment requirements due to the increased risk for lenders.

A Jumbo Loan for a $800,000 home:
  • 20% down = $160,000
  • 5% interest rate
  • $4,268 estimated monthly payment

Jumbo loans allow buying higher-priced homes but have strict requirements.

Fixed vs. ARM Loans

Call or Text Scott Coldwell at 352-290-3512 to get started with your mortgage loan process!

Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two primary types of home loans, differing in how their interest rates are structured.

With a fixed-rate mortgage, the interest rate remains constant throughout the entire loan term, typically 15 or 30 years. This provides stability and predictability in your monthly payments, making it easier to budget and plan for the long term. However, fixed rates are usually higher than the initial rate offered by ARMs.

On the other hand, an ARM starts with a lower introductory interest rate that is fixed for a set period, such as 5 or 7 years. After that initial period, the rate becomes adjustable and can increase or decrease annually based on market conditions. This makes ARMs riskier but potentially more affordable in the short term if interest rates remain low or decline. ARMs may be suitable for borrowers who plan to move or refinance before the rate adjusts, or those who can absorb potential payment increases.

Fixed-rate mortgages offer consistent payments but higher initial rates, while ARMs have lower initial rates but carry the risk of future rate and payment adjustments. The choice depends on your financial situation, tolerance for risk, and plans for the property.

Pros of Fixed-Rate Mortgages:

– Interest rate stays the same for 30 years

– Consistent, predictable monthly payments

– Avoid risk of rising rates

Cons of Fixed-Rate:  

– Initially higher interest rates than ARMs

– Less flexibility if you plan to sell in <10 years

Pros of Adjustable-Rate Mortgages (ARMs):

– Lower initial interest rates (e.g. 3.5%) 

– Ideal if you plan to sell before rate adjusts

– Rates may decrease in the future

Cons of ARMs:

– Rates can rise significantly once they adjust

– Monthly payments can spike

– Interest rate uncertainty

Understanding mortgage types allows buyers to secure the right financing for their situation. Do your research and crunch the numbers to find the best overall fit.

How Much House Can You Afford?

Most mortgage lenders use a debt-to-income (DTI) ratio to determine your maximum affordable monthly mortgage payment, typically capping it around 43-50% of your gross monthly income. However, it’s important to look beyond just qualifying for a mortgage to ensure the total costs of ownership fit comfortably within your budget.

A good rule of thumb is to keep your total monthly housing payment (PITI + HOA) at or below 28% of your gross monthly income, and your overall DTI ratio below 36% including other debts like auto loans, credit cards, and student loans. This provides an affordable ceiling while still having room for other goals like saving and spending. 

Call Mortgage Loan Expert Scott Coldwell

What Are the Different Mortgage Loan Types and Terms?
Scott Coldwell

With access to over 220 lenders that have hundreds of loan products, we have lenders that compete for your business. This includes down payment assistance programs. Don’t let the hurdle of a down payment hold you back any longer. Our Boost DPA program, combined with Scott Coldwell’s expertise, offers an unparalleled opportunity to make your dreams a reality. With a faster, cheaper, and easier mortgage loan process, you can confidently take the first step toward owning your dream home. 

Call or Text Scott Coldwell at 352-290-3512 to get started with your mortgage loan process!

Faster

Get pre-approved in minutes.

Closings on average in 20 days or less.

Cheaper

1% and 3% down options.

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Savings that average over $9,400 versus large banks and retail lenders

Easier

User-friendly technology allows you to track the status of your loan throughout the process

Call or text Scott Coldwell today at 352-290-3512 and discover how the Boost DPA program can unlock the door to homeownership in Florida. Scott’s team of professionals will guide you through every step, ensuring a seamless and stress-free mortgage loan process and experience. Don’t wait – call now and start building your future as a proud homeowner in the great state of Florida!

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