{"id":4786,"date":"2016-05-20T23:35:13","date_gmt":"2016-05-20T23:35:13","guid":{"rendered":"https:\/\/www.movoto.com\/foundation\/?p=4786"},"modified":"2016-05-20T23:35:13","modified_gmt":"2016-05-20T23:35:13","slug":"ultimate-homebuyers-guide-mortgage-types","status":"publish","type":"post","link":"https:\/\/www.movoto.com\/blog\/ultimate-homebuyers-guide-mortgage-types\/","title":{"rendered":"Choose the Right Mortgage Type for You"},"content":{"rendered":"<p><a href=\"https:\/\/www.movoto.com\/foundation\/wp-content\/uploads\/2016\/04\/Mortgage-Types.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-5128 size-full\" src=\"https:\/\/www.movoto.com\/foundation\/wp-content\/uploads\/2016\/04\/Mortgage-Types.jpg\" alt=\"Mortgage-Types\" width=\"600\" height=\"125\" \/><\/a><a href=\"https:\/\/www.movoto.com\/foundation\/basics\/ultimate-homebuyers-guide\"><br \/>\n<\/a><a href=\"https:\/\/www.movoto.com\/foundation\/basics\/ultimate-homebuyers-guide-budgeting-mortgages\"><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-4006\" src=\"https:\/\/www.movoto.com\/foundation\/wp-content\/uploads\/2016\/04\/Budgeting_thumb_2.jpg\" alt=\"Budgeting and Mortgages\" width=\"300\" height=\"250\" \/><\/a>Once you\u2019re pre-approved, you can take a deeper dive into exactly what type of mortgage you want and what taking out a home loan entails.<\/p>\n<h3>Conforming (or Conventional) Loans<\/h3>\n<p>Conforming loans are loans backed by Fannie Mae and Freddie Mac. As such, conforming loans must meet certain guidelines determined by Fannie Mae and Freddie Mac. The borrower must meet a specified debt-to-income (DTI) ratio, be able to pay a minimum percentage for a down payment, and the loan must be under the loan limit (currently $417,000 in the US, although there are exceptions for more expensive counties).<\/p>\n<p><a href=\"http:\/\/www.fhfa.gov\/DataTools\/Downloads\/pages\/conforming-loan-limits.aspx\">Learn more about conforming loan limits &gt;&gt;<\/a><\/p>\n<p>There are two types of conforming mortgages:<\/p>\n<ul>\n<li>Fixed-Rate Mortgage (FRM)<\/li>\n<li>Adjustable-Rate Mortgage (ARM)<\/li>\n<\/ul>\n<p><b>Fixed-Rate Mortgages (FRM) &#8211; <\/b>When you choose an FRM, you\u2019re locked into the current mortgage interest rate for the duration of your loan. The payments are calculated to spread evenly throughout the loan term so you\u2019re paying the same amount every month until the loan is paid.<\/p>\n<p>Pros: If you get a very good rate, you\u2019re locked in for the duration of your loan, even if interest rates rise after you close.<\/p>\n<p>Cons: If the interest rate drops, you\u2019ll still be locked it and might want to refinance to save money. Some fixed-rate mortgages have penalties if you choose to refinance before a certain amount of time.<\/p>\n<p>Good for: Buyers planning to stay in their home long-term.<\/p>\n<p><b>Interest Rates<\/b><\/p>\n<table>\n<tbody>\n<tr>\n<td>January 2006<\/td>\n<td>January 2007<\/td>\n<td>January 2008<\/td>\n<td>January 2009<\/td>\n<td>January 2010<\/td>\n<td>January 2011<\/td>\n<td>January 2012<\/td>\n<td>January 2013<\/td>\n<td>January 2014<\/td>\n<td>January 2015<\/td>\n<td>January 2016<\/td>\n<\/tr>\n<tr>\n<td>6.15<\/td>\n<td>6.22<\/td>\n<td>5.76<\/td>\n<td>5.05<\/td>\n<td>5.03<\/td>\n<td>4.76<\/td>\n<td>3.92<\/td>\n<td>3.41<\/td>\n<td>4.43<\/td>\n<td>3.67<\/td>\n<td>3.87<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p><b>Points<\/b><\/p>\n<table>\n<tbody>\n<tr>\n<td>January 2006<\/td>\n<td>January 2007<\/td>\n<td>January 2008<\/td>\n<td>January 2009<\/td>\n<td>January 2010<\/td>\n<td>January 2011<\/td>\n<td>January 2012<\/td>\n<td>January 2013<\/td>\n<td>January 2014<\/td>\n<td>January 2015<\/td>\n<td>January 2016<\/td>\n<\/tr>\n<tr>\n<td>0.5<\/td>\n<td>0.4<\/td>\n<td>0.4<\/td>\n<td>0.7<\/td>\n<td>0.7<\/td>\n<td>0.8<\/td>\n<td>0.8<\/td>\n<td>0.7<\/td>\n<td>0.7<\/td>\n<td>0.6<\/td>\n<td>0.6<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><b>Adjustable-Rate Mortgages (ARM) &#8211; <\/b>ARMs are the opposite. You start with a rate (typically slightly lower than a fixed-rate), and then your interest is periodically recalculated to reflect new interest rates. Your payments go up or down depending on the market. Your rate is determined by the US Treasury (not your lender) and does come with a rate cap that limits the amount it can increase over the life of your loan\u2014in some cases, there\u2019s a cap to how much it can increase per rate adjustment.<\/p>\n<p><b>Types of ARMs<\/b><\/p>\n<ul>\n<li>1-Year ARM &#8211; Your interest is recalculated every year (riskiest)<\/li>\n<li>3-Year ARM &#8211; your interest is recalculated every 3 years<\/li>\n<li>5-Year ARM &#8211; your interest is recalculated every 5 years<\/li>\n<li>3\/1 ARM &#8211; your interest is fixed for the first 3 years, then recalculated every year<\/li>\n<li>5\/1 ARM &#8211; your interest is fixed for the first 5 years, then recalculated every year<\/li>\n<li>7\/1 ARM &#8211; your interest is fixed for the first 7 years, then recalculated every year<\/li>\n<li>10\/1 ARM &#8211; your interest is fixed for the first 10 years, then recalculated every year (least risky)<\/li>\n<\/ul>\n<p>Pros: You get a lower starting interest rate and potential to save a lot of money if the interest rate drops.<\/p>\n<p>Cons: Conversely, your payments can go up if the interest rate increases.<\/p>\n<p>Good for: Buyers planning to sell in less than 10 years.<\/p>\n<h3>Non-conforming (or Non-conventional) Loans<\/h3>\n<p>If you don\u2019t qualify for a conforming loan, you don\u2019t have to kiss your homeownership dreams goodbye. For prospective homebuyers with bad credit, lenders may provide subprime mortgages with higher interest rates to mitigate the higher risk.<\/p>\n<p>Government guaranteed or government-backed loans are also designed to make owning a home possible for lower income households and those with no credit. Government agencies, such as the Federal Housing Authority (FHA), Veterans Administration (VA), and the US Department of Agriculture (USDA), subsidize the loan, protecting you against defaults on payments. In turn, you can buy for low or no down payments and lenders can offer more affordable interest rates. You might need to meet income, first-time buyer, or veteran status requirements to qualify.<br \/>\n<b>Subprime Mortgages<\/b><br \/>\nSubprime mortgages are designed for people with bad credit or no credit. For those with no credit, there may be alternatives (learn more about getting a mortgage with no credit in the Note About No-Credit Mortgages section), but borrowers who have bad credit have fewer options. Bad credit, usually designated by a credit score below 600, can be the result of a few things:<\/p>\n<ul>\n<li>Bankruptcy<\/li>\n<li>Late bill payments<\/li>\n<li>Too many credit report inquiries<\/li>\n<li>Delinquent or defaulted loans<\/li>\n<li>High credit card balances<\/li>\n<\/ul>\n<p><b>Key Benefits: <\/b>Offers mortgages to those with bad credit, creates opportunities for people to become homeowners.<\/p>\n<p><b>What You Get:<\/b><\/p>\n<ul>\n<li>Looser mortgage approval guidelines<\/li>\n<\/ul>\n<p><b>Requirements:<\/b><\/p>\n<ul>\n<li>Proof of income &#8211; Mass defaults on subprime mortgages were the cause of the 2007 mortgage crisis, so lenders have now tightened regulations on approval for subprime mortgages. In the past, lenders accepted stated income, but now you must provide proof.<\/li>\n<li>Higher interest rate &#8211; Due to the higher risk a lender assumes by lending to a borrower with bad credit, they charge a significantly higher interest rate.<\/li>\n<li>Adjustable-rate only &#8211; The majority of subprime mortgages are ARMs, which can be deceptive. You may start at a lower interest rate, but when it\u2019s recalculated, the monthly payments jump.<\/li>\n<\/ul>\n<p><b>FHA Loans <\/b><\/p>\n<p>FHA loans are insured by the FHA, a subset of the US Department of Housing and Urban Development (HUD). The FHA itself doesn\u2019t grant the loan, so you\u2019ll still have to shop around for rates and do research on the best FHA lender for you. (Search <a href=\"http:\/\/www.hud.gov\/ll\/code\/llslcrit.cfm\">FHA Lenders<\/a>)<\/p>\n<p><b>Key Benefits: <\/b>Lower down payments and looser qualification requirements, including granting loans to people who have foreclosed of filed for bankruptcy in the past.<\/p>\n<p><b>What You Get:<\/b><\/p>\n<ul>\n<li>Down payments as low as 3.5% &#8211; This is contingent on a credit score of 580 or more. Mortgage insurance &#8211; While the FHA doesn\u2019t provide the loan itself, it ensures lenders that if you can\u2019t pay, they\u2019ll pay the lender. This eliminates the need for private mortgage insurance and allows lenders to give loans to lower income applicants.<\/li>\n<li>Potential for no credit approval &#8211; The FHA accepts non-traditional forms of credit such as a proven history of on-time rent payments, so it\u2019s possible to get approval with no credit.<\/li>\n<li>Option for 203(k) loan &#8211; A 203(k) loan, or rehabilitation loan, allows a borrower to get a loan to buy a fixer-upper property and cover the costs to repair it. The property has to be at least a year old and the repairs have to cost at least $5,000.<\/li>\n<li>Relief for unexpected financial hardship &#8211; The FHA has loss mitigation programs in place for borrowers who experience sudden financial hardship. (FHA <a href=\"http:\/\/portal.hud.gov\/hudportal\/HUD?src=\/program_offices\/housing\/sfh\/nsc\/lossmit\">Loss Mitigation Programs<\/a>)<\/li>\n<\/ul>\n<p><b>Requirements:<\/b><\/p>\n<ul>\n<li>Minimum credit score of 580 &#8211; You can still qualify for an FHA loan with a credit score of 500 to 579, but you\u2019ll need to put 10% down.<\/li>\n<li>3.5% down payment &#8211; If you meet the minimum 580 credit score.<\/li>\n<li>No government debt &#8211; This includes any back taxes, prior government loan defaults, and other federal debt.<\/li>\n<li>Purchasing primary residence &#8211; You can\u2019t get an FHA loan on a vacation home or second home. You can get an FHA loan if you\u2019re buying a primary residence for a family member.<\/li>\n<li>Proof of income &#8211; You\u2019ll still need to provide paystubs, W-2s, and tax returns.<\/li>\n<\/ul>\n<p><a href=\"http:\/\/portal.hud.gov\/hudportal\/HUD?src=\/buying\/loans\">Learn more about FHA loans &gt;&gt;<\/a><\/p>\n<p><b>VA Loans<\/b><\/p>\n<p>Loans insured by the VA to specifically help veterans, service members, or surviving spouses purchase homes. Like FHA loans, the VA itself doesn\u2019t provide the loan, so you\u2019ll still have to research VA lenders to find the best rate and terms for you.<\/p>\n<p><b>Key Benefit:<\/b> The VA guarantees to cover a certain percentage of the loan so lenders can provide looser terms.<\/p>\n<p><b>What You Get:<\/b><\/p>\n<ul>\n<li>No down payment &#8211; You have the option of putting no money down when you buy.<\/li>\n<li>Competitive interest rate &#8211; There\u2019s no minimum credit score to qualify, so your interest rate isn\u2019t affected by your score.<\/li>\n<li>Mortgage insurance &#8211; Like FHAs, your loan is backed by the VA, so no need for private insurance.<\/li>\n<li>Potential for no credit approval &#8211; The VA accepts non-traditional forms of credit such as a proven history of on-time rent payments, so it\u2019s possible to get approval with no credit.<\/li>\n<li>Adapted housing grants &#8211; Covers new homes or renovations necessary to accommodate service members injured during active duty.<\/li>\n<li>Interest rate reduction refinance loans &#8211; A streamlined process to refinance your VA loan if interest rates drop.<\/li>\n<li>Other benefits &#8211; Depending on your qualifications, certain borrowers can receive reduced property taxes, lower interest rates for Native American veterans, and other benefits.<\/li>\n<\/ul>\n<p><b>Requirements:<\/b><\/p>\n<ul>\n<li>Active or former military service member &#8211; Or the surviving spouse of a deceased service member.<\/li>\n<li>Meet service requirements &#8211; The length of your duty, your current status, and the character of your service all affect your benefits.<\/li>\n<li>Completed certificate of eligibility (COE) &#8211; <a href=\"https:\/\/www.ebenefits.va.gov\/ebenefits\/about\/feature?feature=cert-of-eligibility-home-loan\">https:\/\/www.ebenefits.va.gov\/ebenefits\/about\/feature?feature=cert-of-eligibility-home-loan<\/a><\/li>\n<li>Credit score minimum &#8211; Usually 620.<\/li>\n<li>Income requirements &#8211; Enough income to cover your payments and bills.<\/li>\n<\/ul>\n<p><a href=\"http:\/\/www.benefits.va.gov\/homeloans\/\">Learn more about VA loans &gt;&gt;<\/a><\/p>\n<p><b>USDA Loans<\/b><\/p>\n<p>Also known as rural development loans, these loans were started in 2014 with the goal of improving the quality of life in rural America.<\/p>\n<p><b>Key Benefits: <\/b>Unlike FHA and VA loans, USDA loans have three types:<\/p>\n<ul>\n<li>USDA-backed loans &#8211; The same concept as FHA and VA loans. The USDA insures the loan you receive from another lender. You\u2019ll still need to research and compare participating lenders.<\/li>\n<li>Direct Loans &#8211; You can borrow directly from the USDA.<\/li>\n<li>Home improvement loans and grants &#8211; These loans or financial awards can be used to make home improvements.<\/li>\n<\/ul>\n<p><b>What You Get:<\/b><\/p>\n<ul>\n<li>Mortgage insurance &#8211; The USDA guarantees your loan if you borrow from an outside lender.<\/li>\n<li>Low interest rate &#8211; You receive more competitive interest rates from both outside lenders and the USDA (in the case of direct loans).<\/li>\n<li>Potential for no credit approval &#8211; The USDA also accepts non-traditional forms of credit such as a proven history of on-time rent payments, so it\u2019s possible to get approval with no credit.<\/li>\n<\/ul>\n<p><b>Requirements:<\/b><\/p>\n<ul>\n<li>Minimum credit score &#8211; The USDA requires a minimum credit score of 620 to go through a quicker approval process. A lower credit score doesn\u2019t necessarily mean you won\u2019t get approved, but you\u2019ll have to meet stricter underwriting requirements.<\/li>\n<li>Must be buying in an approved rural area &#8211; Certain pockets of suburbs qualify as well.<\/li>\n<li>Minimum income &#8211; Your monthly payments have to come out to less than a certain percentage of your income.<\/li>\n<li>Eligible home location &#8211; The property has to be in a rural area or approved suburb.<\/li>\n<li>Income limit &#8211; For direct loans, you have to prove you\u2019re without alternate safe housing and your income isn\u2019t above a certain level.<\/li>\n<\/ul>\n<p><a href=\"http:\/\/www.rd.usda.gov\/programs-services\/single-family-housing-guaranteed-loan-program\">Learn more about USDA loans &gt;&gt;<\/a><\/p>\n<h3>Other Non-conforming Loans<\/h3>\n<p>Any loan that doesn\u2019t conform to traditional rate and mortgage terms is considered non-conforming. Aside from government backed loans, a typical non-conforming loan is the subprime mortgage. Another example of a non-conforming loan is a jumbo loan, or a loan that\u2019s above the $417,000 loan limit. Like subprime mortgages, lenders also consider jumbo loans high risk and charge higher interest rates, have stricter underwriting policies, and often require bigger down payments.<\/p>\n<h3>A Note About No-Credit Mortgages<\/h3>\n<p>It\u2019s difficult, but not impossible, to get a mortgage with no credit history as long as you can prove your creditworthiness in other ways. FHA, VA, and USDA loans all have exceptions in place for lenders with no credit, and even some conforming lenders as well. The following prove non-traditional credit if you\u2019ve been in good standing for one year (you must be able to prove at least three):<\/p>\n<ul>\n<li>On-time rent payments<\/li>\n<li>No delinquent insurance payments (car, health)<\/li>\n<li>No delinquent utility payments (gas, water, phone, cable)<\/li>\n<li>Tuition payments<\/li>\n<li>Demonstrated pattern of putting money into savings<\/li>\n<li>Child care payments (daycare companies)<\/li>\n<li>Retail credit (department store cards)<\/li>\n<\/ul>\n<table style=\"width: 100%; border-spacing: 5px;\">\n<tbody>\n<tr>\n<td style=\"width: 50%;\"><a href=\"https:\/\/www.movoto.com\/foundation\/basics\/ultimate-homebuyers-guide-down-payments\"><span style=\"text-align: left; font-size: 11pt;\">&lt;&lt; PREVIOUS CHAPTER: The Low Down on Down Payments<\/span><\/a><\/td>\n<td style=\"width: 50%; text-align: right;\"><a href=\"https:\/\/www.movoto.com\/foundation\/basics\/ultimate-homebuyers-guide-escrow-account\"><span style=\"text-align: right; font-size: 11pt;\">NEXT CHAPTER: What Is an Escrow Account? &gt;&gt;<\/span><\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><a href=\"https:\/\/www.movoto.com\/foundation\/basics\/ultimate-homebuyers-guide\/\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-5426 size-full\" src=\"https:\/\/www.movoto.com\/foundation\/wp-content\/uploads\/2016\/05\/Hombeuyers-Guide_button.jpg\" alt=\"Hombeuyers-Guide_button\" width=\"334\" height=\"48\" \/><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Once you\u2019re pre-approved, you can take a deeper dive into exactly what type of mortgage you want and what taking out a home loan entails. Conforming (or Conventional) Loans Conforming loans are loans backed by Fannie Mae and Freddie Mac. As such, conforming loans must meet certain guidelines determined by Fannie Mae and Freddie Mac. The borrower must meet a specified debt-to-income (DTI) ratio, be able to pay a minimum percentage for a down payment, and the loan must be under the loan limit (currently $417,000 in the US, although there are exceptions for more expensive counties). Learn more about [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[167,260],"tags":[],"class_list":["post-4786","post","type-post","status-publish","format-standard","hentry","category-basics","category-buyer","post--single"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Choose the Right Mortgage Type for You<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.movoto.com\/blog\/ultimate-homebuyers-guide-mortgage-types\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Choose the Right Mortgage Type for You\" \/>\n<meta property=\"og:description\" content=\"Once you\u2019re pre-approved, you can take a deeper dive into exactly what type of mortgage you want and what taking out a home loan entails. Conforming (or Conventional) Loans Conforming loans are loans backed by Fannie Mae and Freddie Mac. As such, conforming loans must meet certain guidelines determined by Fannie Mae and Freddie Mac. The borrower must meet a specified debt-to-income (DTI) ratio, be able to pay a minimum percentage for a down payment, and the loan must be under the loan limit (currently $417,000 in the US, although there are exceptions for more expensive counties). 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