A Simple Guide to Understanding Different Types of Mortgage Loans

Choosing between different mortgage loans can be complicated for new home buyers who are still learning about the entire home buying process. However complicated they may be, finding the right type of mortgage is crucial as you’ll be paying it back for years. Let the experts in all things real estate at Anne Townes explain a little about the most popular types of mortgages and help you figure out which one is right for you.

What is a Mortgage Exactly?

A mortgage is a loan provided by a money lender to a borrower who is purchasing a piece of real estate. Outlined in the agreement between the lender and borrower is a sort of payment plan that stipulates interest on the mortgage and the monthly installment due. Numerous types of mortgages have different guidelines, interest rates and down payment requirements.

Different Types of Mortgage Loans Explained

Conventional Mortgages

Conventional mortgage loans are the most common mortgages for homeowners. They’re provided by private entities like banks and credit unions and are not backed by any government agency. Conventional mortgages can vary significantly as some lenders require more than 20% down, while others will finance 100% of the real estate value.

Conforming Mortgage Loans

A conforming mortgage loan is any type of loan that meets the requirements set out by the Federal Housing Finance Agency (FHFA) and those set by Fannie Mae and Freddie Mac—two different government-backed entities. Loan requirements may include how much can be borrowed, types of properties, and liability. When the loan meets the requirements, Freddie Mae and Freddie Mac can buy your loan as an investment product. It’s important to note that Freddie Mae and Freddie Mac only work with lenders—you will have no interaction with the entities.

Nonconforming Mortgage Loans (Jumbo mortgage)

Jumbo loans are used for properties that don’t qualify for a conforming loan because they exceed the maximum loan amount stipulated by the FHFA. Private institutions like banks lend these loans, but they’re considered riskier as Freddie Mae or Freddie Mac doesn’t back them. As such, qualifying for a jumbo loan is more stringent.

Government-Insured Federal Housing Administration (FHA) Loans

FHA loans are issued by lenders and insured by the Federal Housing Administration. This type of mortgage is typically geared to first-time home buyers as the qualification requirements are much lower than conventional or conforming mortgages. FHA loans offer up to 96.5% financing—financing depends on your credit score—and typically come with a 15 or 30-year fixed rate interest. Borrowers who put down less than 20% do need to have mortgage insurance.

Government-Insured Veterans Affairs (VA) Loans

VA loans are geared towards veterans, surviving spouses of veterans, and service members. While these loans are provided by private lenders, they’re backed by the Department of Veteran Affairs making them less risky for lenders. Applicants must meet various requirements set out by the VA and then be approved by the lender. VA loans do not require a down payment or mortgage insurance.

Government-Insured U.S. Department of Agriculture (USDA) Loans

USDA loans are similar to VA loans as they’re backed by the U.S. Department of Agriculture. However, rather than being provided solely by private lenders, USDA loans may come from private lenders or directly from the government. These mortgages are tailored to low-income individuals living in rural areas—towns with populations under 35,000 residents.

Which Mortgage is Right for You?

Between looking for houses and applying for a mortgage, buying a home is a lot of work. That’s why at Anne Townes Team, we strive to make the home buying process as easy as possible. We’re top-rated Chester County, PA real estate agents who can help you find the perfect new home! Get in touch with us today to see how we can help you.