A mortgage is a debt instrument that uses real property as collateral. A monthly mortgage payment, determined by the lender, is a combination of principal and interest applied to the loan over time. There are six common types of mortgage loans. A borrower’s financial situation will determine which type of mortgage is right for them.
Typically, a borrower with good credit, stable income and employment, and the ability to make a down payment will qualify for a conventional mortgage loan. Borrowers that can make a 20% down payment usually aren’t required to have private mortgage insurance. This type of loan is not insured by the federal government.
A conforming mortgage loan falls under the federal government’s maximum loan limits. The maximum amount is determined by geographic location and property prices in that area, so the maximum may vary.
A non-conforming mortgage loan is one that exceeds the maximum limit set forth by the government. Non-conforming loans are considered riskier to lenders because the loan can’t be purchased or sold on the secondary mortgage market. To qualify for this type of loan, a borrower must be able to prove a large cash reserve, have strong credit, and put down a large down payment.
Federal Housing Administration Loans
An FHA loan is an option for borrowers that have lower credit scores and less cash. Credit scores can be as low as 500, and down payments can be as low as 3.5%. An FHA loan is a good alternative for borrowers that don’t qualify for a conventional loan.
Veterans Affairs Loans
Active Military, spouses, retirees, and veterans qualify for a VA loan. Borrowers can qualify for 100% of the loan and do not have to pay a down payment. A funding fee may be charged depending on military service and the loan amount; this loan is highly recommended for military personnel.
Department of Agriculture Loans
USDA loans make purchasing possible for low-income borrowers in rural areas that don’t qualify for a conventional mortgage. Down payment requirements are little to none but the property has to meet USDA eligibility requirements.