Types of Mortgages_ Everything About Lenders and Loans You Should Know! 1

Types of Mortgages: Everything About Lenders and Loans You Should Know! 

Buying a home is undoubtedly one of the biggest financial decisions of one life. And as a home buyer, it is quite tiring and confusing to know which mortgage loan to get that fulfills your needs and doesn’t financially burden you in the future. 

Therefore, we have discussed the basic types of mortgages and the top 5 mortgage programs you can get to buy, repair, construct, or maintain your home. So, make sure that you read this article till the end and find your answers! 

How Does Mortgage Work? 

Individuals and small businesses buy properties by using mortgage schemes. They borrow money from lenders and pay it back along with interest. Here is a simple step-by-step guide to how mortgage schemes work:

  • The potential borrower applies to different lenders and provides essential financial information like taxes, employment records, credit scores, bank statements, and other relevant documentation. 
  • The lender will run a background check on the borrower and ensure its eligibility on standard criteria. 
  • The borrowers make the down payment for the property, costing between 3% to 5% of the property’s total cost.
  • The lender provides the loan amount with specific rules and conditions regarding monthly installments, interest rates, and repair management. 
  • And then, the borrower repays the whole loan amount in monthly installments. They also have the option to pay more than the decided money and get rid of the loan quickly.
  • If the borrower fails to repay the amount in the decided time, the lender has the authority to take legal action and seize the property. 

Related: How to Buy a House with Low Income?

Types of Mortgages

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1. Federal Housing Association loan

Powered by the Federal Housing Association, a Department of Housing and Urban Development division, FHA loans are suitable for first-time home buyers. They have flexible mortgage conditions, essential eligibility criteria, and low down payment requirements. 

Eligibility Criteria:

  • The minimum credit score required for a qualifying FHA loan is 500, although 580 is considered a good score for potential borrowers. 
  • The required down payment for an FHA loan is as low as 3.5% only. 
  • An average of 43% or less debt-to-income ratio is required. 
  • A steady employment history with enough income is mandatory. 

Additional Features: 

  • FHA loans are not applicable for properties with a second residence or investment purposes. The borrower must consider the home as the first residence. 
  • The FHA loan applies to FHA-approved projects like detached and semi-detached homes, condominiums, row houses, and townhouses. 
  • FHA loans also have a fund-relief program for borrowers suffering from financial instability. 
  • The FHA loans have higher interest rates as compared with similar loan programs.
  • It has a paying-back time of around 15 years. 
  • FHA loans also require purchasing PMI by the borrowers to protect lenders’ rights. 

2. United States Department of Agriculture loan

Powered by the United States Department of Agriculture, it is a mortgage program for low-income rural area residents to buy a home, as they can’t qualify for conventional loans due to high eligibility criteria.

Eligibility Criteria:

  • The location of the potential home must be far from metropolitan cities and in rural or suburban areas, having a population of approximately 35,000. 
  • An average 680 credit score is needed, but you can still qualify if the score is lower. 
  • A 41% or lower debt-to-income ratio is required, but the criteria can be changed according to the borrower’s financial status. 

Additional Features: 

  • The potential borrower must use the home as its primary residence as a USDA loan is not applicable for investment and second residences. 
  • The loan paying back time can range from 30 to 38 years. 
  • It offers up to 100% of the home’s finances without down payment requirements. 
  • There are two types of USDA loans; Guaranteed USDA loans (given by USDA-approved lenders) and Direct USDA loans (provided by the USDA department).
  • This loan can be used to buy, repair, construct, or maintain your home. 

3. Veterans Affairs loan

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Powered by the United States Department of Veterans Affairs, it applies to veterans, service members, retired members, and their spouses. It is issued through private lenders and has little or no down payment requirement

Eligibility Criteria: 

  • The main requirement for a VA loan is military service experience for 90 days during wartime and 181 days in peacetime. 
  • The borrower must have a Certificate of Eligibility for the loan from the VA department. 
  • There is no minimum credit score requirement, but a 41% debt-to-income ratio is mandatory. 

Additional Features:

  • The potential property must be the borrower’s primary residence, as a VA loan is not applicable for secondary residence and investment properties. 
  • The borrowers of VA loans can get up to 100% of the finances, which means there is no down payment required under certain criteria. 
  • There is no requirement for purchasing the PMI. 

4. Fannie Mae Home Ready Program

Powered by Fannie Mae, it is a great mortgage program for low-to-moderate-income holders, offering low eligibility requirements, low down payment, less financing, additional costs, and low mortgage insurance costs. 

Eligibility Criteria:

  • Although a 620 credit score is needed for borrowers, a score of 680 or higher can help them get better loan options and conditions. 
  • A 3% down payment is required for complete home purchasing costs.
  • The debt-to-income ratio must be 45% or lower. But according to certain criteria, a higher DTI ratio is acceptable. 
  • The potential borrower must have completed Fannie Mae online homebuyer education course. 
  • The borrower’s income should range between 80% to 100% of the Area Median Income (AMI). 

Additional Features: 

  • Home Ready mortgage plan is applicable for first-time or repetitive buyers. Anyone that wants to refinance their existing mortgage plan is also eligible for a Fannie Mae loan.
  • The potential bust must be the borrower’s primary residence, as Home ready loan is not applicable for second homes and investment properties.
  • For a down payment, instead of using personal funds, a borrower can use gift cards, grants, and Community Second mortgages. 
  • The borrowers have to buy Mortgage insurance that can increase the overall cost of the loan. 
  • With a Home Ready loan, you can only buy a home in low-to-moderate income areas, as it is not applicable for high-income area houses. 
  • The borrower can use a non-occupant co-borrower to meet the financial requirements. 

5. Home Possible Loan

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Powered by Freddie Mac, it is another mortgage plan suitable for potential homebuyers with low-to-moderate income. It has a low down payment and basic eligibility criteria, allowing buyers to buy property in any area with flexible conditions.

Eligibility Criteria: 

  • A minimum 660 credit score is required to qualify for the Home Possible loan. Although 680 is considered to be a good score with more benefits and flexible terms. 
  • The required debt-to-income ratio should be lesser or equal to 45%, but potential borrowers with a higher DTI ratio may also qualify under certain conditions. 
  • Only 3% of the down payment is required.
  • The borrower must have completed a homebuyer education course offered by Freddie Mac or any other approved lender. 
  • The income of the borrower must range between 80% to 100% of the AMI. 

Additional Features: 

  • Instead of using personal funds, the borrower can pay the down payment through various flexible options like gift cards, grants, and Community Second assistance loans. 
  • If the down payment is less than 20%, the borrower has to buy a Mortgage Insurance policy. 
  • Freddie Mac Home Possible loan allows the buyer to purchase property without location restrictions. 
  • This has strong and long-term reselling restrictions on the property. 
  • There are specific loan limit restrictions, which means you may get less funds than you need. 

Frequently Asked Questions 

What Is the Private Mortgage Insurance Fee?

Private Mortgage Insurance Fees are additional costs that protect the lender’s money if the borrower defaults or fails to repay the money. It mostly applies to borrowers with a down payment of less than 20% of the total home cost. 

Can I get a loan if my credit score is low?

Although having a low credit score makes it challenging to qualify for a mortgage program but not possible, you can get a loan to finance your home decision with a low credit score. You only have to research and check the mortgage programs that suit your credit score condition. 

Final Words

As you have a basic overview of what mortgage you should get and how it will work, it is time to find a reliable and professional lender. Make sure you compare multiple lenders, their services, available loan programs, interest rates, paying back period, and conditions. And after finding one, apply for the loan, get your money, and start living in your dream home!