A No-Nonsense Guide to the Different Types of Mortgages (Part Two)
In part one of our “Different Types of Mortgages” series, we talked about fixed and adjustable rate mortgages. The next important consideration when looking at your mortgage options is whether to go for a government-insured home loan, or a conventional one.
Government Insured vs. Conventional Mortgages
The main difference between conventional and government-insured mortgages lies in how these loans are handled when a borrower defaults. With a conventional loan, your lender takes the risk -- and pays the price if you default.
For a government-insured loan, government programs pay back some or all of the outstanding loan amount to the lender. Because of this, government-insured loans are often easier for first-time home buyers to attain.
Conventional Mortgages
Conventional loans are both offered and insured by a private lender. Though it’s a huge boon to have 20% or more for a down payment on a conventional mortgage, this isn’t a requirement. With less than 20% down, borrowers must usually pay PMI or private mortgage insurance. This can get expensive, but can also be canceled after the borrower has built up at least 20% equity in their home.
FHA Loans
FHA loans are backed by the Federal Housing Administration. These loans offer several advantages when compared to conventional, privately-insured home loans. First off, FHA loans have significantly lower credit score requirements than many other loans, with a minimum credit score requirement of only 580. These loans are also easy to qualify for since they typically require a down payment of only 3.5%.
VA Loans
VA loans are backed by the U.S. Department of Veterans Affairs. These mortgages are designed to help veterans of the U.S. military, surviving spouses, and other eligible parties (like certain National Guard and Reserve members) attain home ownership without the challenges associated with conventional and other loan programs.
VA home loans don’t require a down payment, are offered at relatively low interest rates, and are especially lenient when it comes to missed payments and other financial hardships.
USDA Loans
USDA loans are designed for individuals in rural areas. These loans help low-to-moderate income families attain homeownership. Because of that, USDA loans are strictly limited by area.
If you do live in an eligible area, you can often qualify for a zero percent down payment loan. You’ll likely also have lower mortgage insurance costs than FHA or conventional loans, and particularly flexible repayment terms. In fact, some repayment terms are actually based on a borrower’s income.
Up Next: Part Three of the Different Types of Mortgages: Jumbo Loans vs. Conforming Loans