You’re finally in a position where you’re ready to buy a house. You’ve got some money in the bank and spent some time working on your credit. You’ve even held the same job now for two years.
So, what’s next?
Well, the next step you’ll want to complete is finding the right loan to use to make your purchase, and this is definitely a step that leaves a lot of people feeling confused – especially first-time homebuyers.
You might have questions such as:
What type of loan should you get?
What do all these mortgage loan terms mean?
What should you look for in a mortgage?
If this is where you are, I can help. I’ll explain to you the main types of mortgage loans available as well as the most common loan terms you’ll hear along the way.
After reading this, you’ll have a much better understanding of mortgages, and this will help you choose the right one for your upcoming house purchase.
Conventional vs. Unconventional Loans
If you spend any amount of time looking up mortgage loans, you’ll probably notice there are a lot of different types of loans but most loan types fall into one of two categories:
A conventional loan is a mortgage loan that requires meeting guidelines of Fannie Mae. Fannie Mae is a mortgage association that sets up guidelines borrowers must meet in a way that provides protection over lenders.
A loan that falls into this category is not backed by the U.S. government which means there is more risk for the lender who issues the loan.
To qualify for a conventional loan, you must meet all the guidelines and criteria set forth by Fannie Mae.
People who use conventional loans typically have a lot of money to use for the down payment and have great credit. They generally also do not have a history that contains a bankruptcy or a foreclosure.
Unconventional loans do not have to meet the criteria set by Fannie Mae and are backed completely by the U.S. government. These loans come in different types, including the following:
- FHA loans – This is a loan backed by the Federal Housing Administration.
- VA loans – This loan type is backed by the Department of Veterans Affairs.
- USDA loans – This loan is backed by the United States Department of Agriculture.
People often choose unconventional loan types when they have credit that is less than perfect and when they do not have a lot of money for their down payment.
A person with a bankruptcy or foreclosure in the past could also benefit from an unconventional loan.
The reason is that the requirements for unconventional loans are less stringent than those for conventional loans. In other words, it’s easier to qualify for an unconventional loan compared to a conventional loan.
Common Mortgage Loan Terms
The loans we’ve talked about so far are the different options you have when choosing an actual loan type but now let’s discuss the different terms you will come across during the loan process.
Length or Duration
One term you will hear about is called the duration or length. This refers to the amount of time the loan gives you to repay it in full. Loans are generally 30 years in length but could be shorter or longer.
Fixed Interest Versus Adjustable Rate Mortgage (ARM)
The way your interest rate works on the loan will be one of these options. A fixed rate offers a rate that never changes while an ARM is subject to change.
To earn a lower interest rate, some lenders and loan types allow you to purchase points. This process requires an upfront payment of cash in exchange for a lower rate of interest on your loan.
These terms are things you will have to decide on when getting a mortgage so it’s definitely important to understand each of them.
Loan Fees and Closing Costs
The next thing you’ll want to understand about mortgage loans is the fees and costs they come with. Every single loan type available will have fees and closing costs but the amounts and types might vary.
Mortgage insurance is also considered a fee of a mortgage loan, and while not all types of loans require mortgage insurance, most types do require some form of mortgage insurance.
Loan fees and closing costs are inevitable, though, so you really shouldn’t base your decision too much on the amount you’ll have to pay for these fees because you’ll have them with any loan type.
What Is the Right Type for You?
One of the hardest parts of choosing a mortgage is figuring out which type is the best for your situation. Lenders often help borrowers make this decision by looking at the following factors:
- Credit score
- Money to put down
- Bankruptcy and foreclosure history
These are the three big factors that will affect what types of loans you qualify for and what type would be the best.
Keep in mind, you’ll have a harder time qualifying for a conventional loan if your credit score is not high or if you don’t have a large down payment. It will also be harder to qualify if you went through a bankruptcy or foreclosure in your past.
An FHA loan is often the best type for a person that does not meet the criteria for a conventional loan. You can find out more about the benefits of FHA loans by looking up FHA loan information.
Your Next Step
Now that you have a better grip on the most common mortgage loan terms and loan types, you might have a better idea of what loan type is right for you and what to look for in the mortgage loan.
If you have further questions or need advice about your situation, read our blog for more helpful tips on choosing the right mortgage loan.