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What the Heck Are Mortgage Loan Types?

Updated: Feb 14, 2022

I know, I know... this is stuff some of you wish you never had to think about. However, when you think about taking control of and empowering your financial future, understanding the different types of loans suddenly sounds a whole lot more appealing.

Believe it or not, this was one of the most-asked questions on an Instagram Poll I did last week, so I appreciate that you know you can come to me with any real estate question out there!

In this blog, we'll go over five main mortgage types: FHA, VA, Conventional, Adjustable-Rate & Bridge loans.

I'll even add in a little extra sprinkle about 30 and 15 year fixed rate loans. I bet it feels like Christmas, doesn't it? ;)

FHA Loans

While most home loans require a downpayment of 20%, a Federal Housing Administration (FHA) Loan lets you put down as little as 3.5%. These loans are government-backed and therefore provide a little extra security on the lender, should the buyer fail to continue to pay on their mortgage.

Who This Loan is Right For

  • If your savings account isn't quite as padded as you'd like (mine isn't either but we're all working on it!), you could be a great fit for an FHA loan.

This Loan Might Not Be Right For You If

  • Since there are additional requirements that come with the loan, such as your purchase price needing to be under $417,000, if you're looking to buy a home over that purchase price you'll have to come up with a larger downpayment.

  • These loans don't provide much flexibility and are usually fixed-rate mortgages with the typical 15 to 30 year terms.

VA Loans

If you've served in the US Military, a Veterans Affairs (VA) Loan could be the perfect fit for you.

Who This Loan is Right For

  • If you meet VA loan qualifications you'll be moving into your new home in no time, with no downpayment and zero requirements to hold mortgage insurance.

  • In order to qualify for a VA loan you must meet the following: 90 day consecutive service during war time, 180 day consecutive service during peace time or 6 years serving in the reserves.

This Loan Might Not Be Right For You If

  • If you didn't serve in the military, well, you don't qualify for a VA Loan.

  • If you served in the US Military, but received a dishonorable discharge, you may not qualify for the VA Loan. Check with your local VA.

  • If you're looking for a rental property or "fixer-upper." a VA loan won't be right for you. Since VA loans are government-backed, any home you want to purchase must meet "minimum property requirements" and must be your primary residence. Sorry to burst your bubble, Chip and Joanna.

Conventional Mortgage Loans

A conventional fixed-rate loan, is the most common type of conventional loan out there. Fixed-rate means that the loan is given with one single interest rate, and therefore, one monthly payment for the life of the loan. These loans typically have a lifetime of 15 or 30 years.

Who This Loan is Right For

If you're craving predictability and you aren't planning on moving anytime soon, post-purchase, a conventional fixed-rate loan might be for you!

  • For your mortgage, you'll be paying X fixed amount for Y years. That's it!

  • Fixed rate loans require a downpayment. The amount of the downpayment that's needed will rise and fall depending on what interest rates are doing at the time of your purchase, but once you're locked in you'll know what to expect for the next 15 to 30 years.

This Loan Might Not Be Right For You If

  • You plan on moving fairly soon.

  • A fixed-rate mortgage is best for people who plan on staying in their home for a good chunk of their lives; or at least for a good chunk of the life of the loan.

Adjustable-Rate Mortgage

After reading about fixed-rate loans, I'm sure this will come as no surprise. Adjustable rate mortgages (ARM) offer rates that are typically lower than you'd get with a fixed-rate mortgage for a specific time period. This period could be anywhere from 5-10 years instead for the entire life of the loan.

What's tricky about an ARM is that, after your time period is up, your interest rates and corresponding monthly payments will adjust. If interest rates shoot up, so will your monthly payments. If interest rates fall, your monthly payments will fall too.

Who This Loan is Right For

Adjustable rate mortgages are good for home buyers that may have a lower credit score. Since poor credit typically means that getting a good rate on a fixed-rate loan, an ARM may be the best option!

If you plan on selling your home before the aforementioned fixed-rate period is up you may also want to consider an ARM.

Bridge Loans

Sometimes referred to as "repeat financing" or a gap loan, bridge loans can be a great option if you're looking to buy before selling your previous residence. Why would you do that, you may ask?

Imagine that you've started the house-hunting process and your house is already on the market. You find your absolute dream home but there's already an offer on it. You know, with all your heart, that this is your home and you have to at least try. Qualifying for a bridge loan lets your lender wrap your current and new mortgage payments into one. Once your home has sold, you pay off the mortgage and refinance.

Who This Loan is Right For

  • This is perfect for the above scenario and also for homeowners who have excellent credit and a low debt-to-income ratio. If you don't need to finance more than 80% of the two homes combined value, and you can meet all of these criteria - go for it!

This Loan Might Not Be Right For You If

  • Having two mortgages will stretch you too much financially.

  • Having two mortgages will be an emotional burden. The buying and selling process can be stressful enough, although The Better Co. always strives to make every transition as fun and as stress-free as possible. If this loan doesn't make 100% sense for you, don't stretch yourself.

For more questions, tips, tricks, and real estate news follow Bethany on Instagram.
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