People prefer to take out loans to buy real estate with a high price like home. These loans, which are given on the basis of a certain agreement between the lender and the borrower, are called home loans. Although the first thing that comes to mind about home loans is getting loans for home, home loans can also be taken for investment purposes. Home loans are divided into groups depending on the areas in which they will be used, interest types and how they are received.
What are the types of home loans?
It is possible to examine home loans in 5 groups. But regardless of the type of home loans, the borrower cannot be the actual owner of the property without paying the debt completely, depending on the contract made by the lender and the borrower. If the borrower cannot pay his debt during this period (Home loans are usually repaid within 10, 15 or 30 years.), the lender has the right to own the real estate, sell the real estate and use the borrower’s income to pay the debt. The types of home loans are as follows;
- Conventional home loans
- Jumbo home loans
- Government-insured home loans
- Fixed-rate home loans
- Adjustable-rate home loans
Conventional home loans;
Conventional home loans are a type of home loan that is not insured by the government and divided into two groups. These two types; conforming home loans and non-conforming home loans.
For a loan to comply with the definition of conforming home loans, it must remain within the maximum limits set by government agencies Fannie Mae or Freddie Mac that support most US mortgages. Home loans that do not meet these criteria are non-conforming home loans. Generally, lenders ask you to pay private mortgage insurance if you pay less than 20% of home loans as a down payment.
Advantages of conventional home loans;
- Overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher.
- Can be used for a primary home, second home or investment property.
- You can pay as little as 3 percent down for home loans backed by Fannie Mae or Freddie Mac.
- You can ask your lender to cancel private mortgage insurance once you’ve gained 20 percent equity.
Disadvantages of conventional home loans;
- Likely must pay PMI if your down payment is less than 20 percent of the sales price.
- You must have a debt-to-income ratio of 45 to 50 percent.
- Significant documentation required to verify income, assets, down payment and employment.
- In order to receive conventional home loans, the minimum score of FICO 620 or higher is required.
Conventional home loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.
Jumbo home loans;
Jumbo home loans are the type of home loan preferred by borrowers for homes where home prices exceed federal credit limits. In other words, these loans, are conventional loans that have non-conforming loan limits. For example; For 2018, the maximum conforming loan limit for single-family homes in most of the U.S. is $453,100, according to the Federal Housing Finance Agency. Jumbo home loans are used in regions with costs above this price and generally require more in-depth documentation to qualify.
Advantages of Jumbo home loans;
- Interest rates tend to be competitive with other conventional home loans.
- You can borrow more money to buy a home in an expensive area.
Disadvantages of Jumbo home loans;
- For receive these home loans, A FICO score of 700 or higher typically is required, although some lenders will accept a minimum score of 660.
- Down payment of at least 10 to 20 percent is needed.
- Must show you have significant assets (10 percent of the home loans amount) in cash or savings accounts.
- You cannot have a debt-to-income ratio above 45 percent.
People who want to get Jumbo home loans should have good to excellent credit, high incomes and a substantial down payment. Jumbo home loans make sense for more affluent buyers purchasing a high-end home. Many reputable lenders offer jumbo home loans at competitive rates.
Government-insured home loans;
Government insured home loans are a type of home loans in which three American government agencies are repaying home loans so that more Americans can become homeowners. These three state institutions are; the U.S. Department of Agriculture (USDA loans), the Federal Housing Administration (FHA loans) and the U.S. Department of Veterans Affairs (VA loans).
USDA loans are home loans that help moderate- to low-income individuals to buy houses in rural areas. In order to receive USDA loans, you must purchase a suitable home and meet the income limits set in order to qualify for USDA loans. Even, if you meet these criteria and you have very low income, some USDA loans do not require down payment.
FHA loans are home loans obtained by borrowers supported by FHA who don’t have pristine credit and do not have a large down payment. Borrowers wishing to receive these home loans must have a minimum FICO score of 580 to get FHA’s maximum 3.5 percent financing. But, if you pay at least 10% of home loans as a down payment for these home loans, 500 FICO points are also sufficient.
VA loans are a type of home loan that allows members of the US army (active duty and veterans) and their families to receive flexible, low-interest home loans. VA loans are more advantageous than other home loans. These home loans do not require down payment or private mortgage insurance. In addition, closing costs are usually paid by vendors. However, in VA loans, a funding fee is charged. This funding fee as well as other closing costs, paid upfront at closing or can be rolled into most VA loans.
Advantages of government-insured home loans;
- You don’t need a large down payment.
- They help you finance a home when you don’t qualify for a conventional loan.
- They’re open to repeat and first-time buyers.
- Credit requirements are more relaxed.
Disadvantages of government-insured home loans;
- Expect to pay mandatory mortgage insurance premiums that cannot be canceled on some government-insured home loans.
- Expect to provide more documentation, depending on the loan type, to prove eligibility.
- You’ll have higher overall borrowing costs.
Government-insured home loans are ideal if you less-than-stellar credit, have low cash savings and can’t qualify for a conventional loan.
Fixed-rate home loans;
Fixed-rate home loans are a type of home loans usually received with a maturity of 15, 20 or 30 years, and monthly payments are determined at a fixed interest rate.
Advantages of fixed-rate home loans;
- You can more precisely budget other expenses month to month.
- Your monthly interest and principal payments stay the same throughout the life of the loan.
Disadvantages of fixed-rate home loans;
- It takes longer to build equity in your home.
- You’ll generally pay more interest with a longer-term, fixed-rate loan.
- Interest rates typically are higher than rates on adjustable-rate mortgages.
If you plan to stay in your home for at least seven to 10 years, fixed-rate home loans offers stability with your monthly payments.
Adjustable-rate home loans;
Adjustable-rate home loans are a type of home loans with interest rate fluctuations that can go up or down in market conditions. The initial payments of many adjustable-rate home loans have a fixed rate of interest. After these payments, adjustable-rate home loans will have increasing interest rates.
Advantages of adjustable-rate home loans;
- You’ll save a substantial amount of money on interest payments.
- You’ll enjoy a lower fixed rate in the first few years of homeownership.
Disadvantages of adjustable-rate home loans;
- Home values may fall in a few years, making it harder to refinance or sell your home before the loan resets.
- Your monthly mortgage payments could become unaffordable, resulting in a loan default.
If you don’t plan to stay in your home beyond a few years, adjustable-rate home loans could save you big on interest payments.
In summary, there are multiple types of home loans, and each home loan works differently. In order to find the most suitable type of home loan for you, you should review your conditions and decide.