The Different Types of Home Loans: Which One Is Right for You?

Are you ready to become a homeowner but confused about which loan is right for you?

The type of loan that will best fit you and your family depends on a number of factors, including your credit score, the home you’re buying, and your access to cash flow. The various home loans available to buyers also change based on overall costs, interest rates, and qualifications.

Here’s an overview of some of the different types of home loans that are out there.

Conventional Home Loans

Conventional loans are one of a few types of home loans not financed by the federal government. They’re subdivided into two categories: conforming and non-conforming.

Conforming Loans

Conforming loans are home loans that meet the guidelines set by Fannie Mae and Freddie Mac, two home mortgage companies created by the United States Congress.

It’s important to note that Fannie Mae and Freddie Mac don’t issue home loans—they buy and guarantee mortgages through lenders, such as banks and credit unions.

Non-Conforming Loans

These types of home loans don’t conform to Fannie Mae or Freddie Mac standards.

Typically, it means there’s a requirement set by the Federal Housing Finance Agency (FHFA) that’s not met, or the loan amount exceeds what would be accepted under a conforming loan.

The Pros and Cons of Conventional Home Loans

Some of the advantages of conventional loans include:

• You can use them to purchase either a primary residence, a secondary home, or an investment property
• Borrowing costs tend to be lower overall compared to other mortgages
• Sellers can contribute to closing costs

Some of the downsides include:

• Higher down payments compared to government loans
• Higher credit score requirements
• Lower debt-to-income ratio required

Conventional loans are typically suitable for individuals with good credit who can make a sizeable down payment.

Government-Insured Loans

Although the government itself isn’t considered a mortgage lender, it plays an important role in helping more Americans become homeowners.

Three different U.S. government agencies help finance mortgages: the U.S. Department of Agriculture, the U.S. Department of Veterans Affairs, and the Federal Housing Administration.

Each of the home loans made available by the government has varying requirements and stipulations for borrowers. In general, however, they make homeownership more accessible to those with lower incomes or credit scores.

Pros and Cons

The advantages of government loans include:

• Accessibility to financing when disqualified from conventional loans
• More relaxed credit requirements
• No large down payment required
• Available for both first-time homeowners and repeat buyers

Some of the drawbacks include:

• Loan limits
• Borrowers are required to live in the property (meaning the loan can’t be used for investment properties)
• Potentially higher borrowing costs overall

If you have a lower credit score or don’t have access to significant cash reserves to make a down payment, a government-issued loan could be right for you.

Fixed-Rate Mortgages

These types of home loans are beneficial because they stick with the same interest rate throughout the entire duration of your loan. That means you always pay the same minimum monthly mortgage payment.

Pros and Cons

Some of the benefits of fixed-rate mortgages include:

• The same interest rates throughout the life of the loan
• Ability to budget easier for housing expenses

Disadvantages include:

• Potentially higher interest rates
• Having to refinance the loan to get lower rates when interest rates fall

For homeowners who intend to live in their homes for a minimum of five to seven years and also want to avoid fluctuating monthly payments, fixed-rate mortgage loans could be the ideal solution.

Finding the Right Type of Home Loan

Many other types of home loans are available to those looking to purchase a home. We can make the process a little easier. Contact The Selby Team to get started on finding your new home.