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Types of mortgages

Buyers can choose from among a number of mortgages, each with a set of conditions that can make home ownership a reality.

Below are some of the options. Choose one that’s most applicable to you and closest to your situation.

According to rate terms

  • Fixed-rate mortgage

This is the most popular type of mortgage, whose  key feature is the fixed nature of the interest rate throughout the term of the loan. This is  recommended if interest rates are very low or is at its lowest point.

  • Adjustable rate mortgage

The interest rate is fixed for the first few years of the term. It is then adjusted according to the benchmark market rate. This is recommended for buyers who do not intend to stay too long in the property.


According to guarantee

  • Conventional mortgage

This mortgage loan is not insured or guaranteed by the federal government and requires a higher down payment and credit score. Conventional mortgage is much more flexible since banks can set their own underwriting guidelines with it.

  • Governmentinsured mortgage

This is what the three, government-backed mortgage types are collectively called. The federal government itself guarantees these types of mortgage.

  1. Federal Housing Administration (FHA) Loan

Managed by the US Department of Housing and Urban Development, this is  usually not considered a loan,  but an insurance of a loan from an independent party like a bank. It protects the lender against losses from borrower default. This is recommended for buyers who do not qualify for conventional mortgage.

  1. VA Loan

This is meant for military service members and their family. It’s guaranteed by the US Department of Veterans Affairs, and provided by private lenders like  banks.

The loanable amount is  limited, but  borrowers can get 100 percent financing.

Strict requirements must be met, however.  They include  any of the following:

  • You must have served 181 days of active duty during peacetime
  • You must have rendered 90 service days during wartime
  • You must have more than 6 years of service in the National Guard Reserves
  • You’re an un-remarried spouse of a veteran who died in service or from a disability while in service

 

  1. USDA / RHA Loans

Offered by the US Department of Agriculture (USDA) and managed by the Rural Housing Service, this type of loan is recommended for rural residents with modest to low incomes and are unable to get housing the conventional way. The property should be in an eligible rural area as defined by the USDA.

According to size

  • Conforming loan

This should meet underwriting guidelines of Fannie Mae or Freddie Mac, government-controlled corporations that buy and sell mortgage-backed securities. A conforming loan must fall within set maximum limits and meet pre-established criteria. The most well-known guideline, set in 2013, pegs the maximum loan amount at  $417,000 for a single-family home.

  • Jumbo loan

This exceeds conforming loan limits and presents a higher risk to the lender.  It usually covers  luxury homes and investment properties.  As such,  it’s recommended for buyers with stellar credit scores, 6 to 12 months’ worth of reserves, and a debt-to-income ratio of 43 % or less.  Two appraisals are required. This type of loan is the hardest to get.

Borrowers can combine the various types of mortgages.   Many of them, for instance, go for an FHA loan with a fixed interest rate that covers a 15-year term .