As you get more serious about purchasing a home, I've found that it is helpful to understand all mortgage loan types before you officially sit with a lender and start talking about financing a home. There are quite a few loan types that you may be eligible for and might end up either helping you get into a home or saving you a pretty penny down the road. Here are a few loan types to get you started:
Conventional/Fixed Rate Mortgage
Most existing loans are conventional and there is a reason for that. These are the safest kind of loans because they are immune to mortgage rate changes that can occur over the lifespan of the loan. They come in 10, 15, 20, and 30-year sizes, with the most common being 30 years. They typically have a down payment threshold of 20%. If you are in it for the long run, this is your best bet.
Adjustable-Rate Mortgage (ARM)
There are various types of ARM loans, but the basic idea is that the initial interest rate for the first three, five, or seven years is locked in and then is subject to the current rate once that time period for every year after. If you don't plan on being in the home longer than that initial period where rates are locked, this might be perfect. If you stay longer, you will be subject to the market rate fluctuation which can cause your rates to go up or down each year.
Federal Housing Administration (FHA)
If you can't make the 20% down payment cost, FHA loans only require ~3% down. The downside is that there is a cap on the total amount loaned and rates are usually fixed, with 15 or 30-year options. You will also be required to pay Mortgage Insurance (PMI or MI) which adds to your monthly mortgage payment (~1% the cost of your loan).
Veterans Affairs (VA)
If you've served in the military, you have this option available to you. This loan doesn't require any money down, usually covers 100% of the home's value, and doesn't require mortgage insurance. Uncle Sam's loan is hard to resist!
Bridge Loan (Gap loan)
If you are trying to buy and sell at the same time, this is an excellent option for a smooth transition. This loan lets you combine your existing mortgage and new loan into one. Once you sell your house, you pay off that mortgage and refinance on the remaining amount for your new home. You must have excellent credit, a low DTI ratio, and don't need to finance more than 80% of both homes combined value.
Hopefully, this will arm you with the basics of each loan type and will help you be prepared when talking with a lender. If you want any more clarification, reach out to me at any time!
