{"id":14370,"date":"2024-05-21T12:06:10","date_gmt":"2024-05-21T18:06:10","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=14370"},"modified":"2024-09-04T13:36:18","modified_gmt":"2024-09-04T19:36:18","slug":"types-of-mortgage-loans","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/loans\/types-of-mortgage-loans.html","title":{"rendered":"5 types of mortgages to help you purchase a home"},"content":{"rendered":"\n
\"You\u2019ve<\/figure>\n\n\n\n

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.<\/em> See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

In the United States, the median home price<\/a> reached $431,000 in the third quarter of 2023. Unless they\u2019ve been stockpiling money, most people don\u2019t have enough cash to purchase a home outright. That\u2019s why mortgages exist.\u00a0To help you understand your financing options when you\u2019re looking to buy a house, here\u2019s an overview of the five types of mortgages available to residential buyers.<\/p>\n\n\n\n

What is a mortgage?<\/h2>\n\n\n\n

A mortgage is a type of loan used to purchase real estate. If you don\u2019t repay the loan as agreed, the lender has the right to take the property from you, sell it and use the money from the sale to cover your balance. This is a process known as foreclosure.<\/p>\n\n\n\n

When you\u2019re shopping for a mortgage, it\u2019s important to understand the terminology used by real estate agents, brokers and other professionals.<\/p>\n\n\n\n

Principal<\/strong> is the amount of money you borrow. For example, if you need to borrow $380,000 to cover the cost of a home, you have a principal balance of $380,000.<\/p>\n\n\n\n

Interest<\/strong> is the cost of borrowing money. It\u2019s usually expressed as a percentage, for example, 5.8 percent. A high interest rate could increase your total cost of ownership by hundreds of thousands of dollars, so it\u2019s important to shop around for the best rates.<\/p>\n\n\n\n

Your loan term<\/strong> is how long you have to pay back the loan. The two most common loan terms are 15 years and 30 years. So, for example, if you have a 30-year mortgage, you have 30 years to pay back the principal balance.<\/p>\n\n\n\n

\"Mortgage<\/figure>\n\n\n\n

When you shop for a mortgage, you also need to think about your monthly payment. In many cases, you\u2019re required to put property taxes and homeowners insurance premiums into an escrow account. If this applies to your situation, your monthly mortgage payment will be higher to account for insurance and taxes.<\/p>\n\n\n\n

5 types of mortgages<\/h2>\n\n\n\n

Although every mortgage has the same basic purpose, different types of mortgages address different situations. Here are the five most common.<\/p>\n\n\n\n

Conventional<\/h3>\n\n\n\n

A conventional loan is a mortgage that\u2019s not part of a government program<\/a>. You get this type of mortgage through a private bank or credit union. One of the main advantages to getting a conventional loan is you don\u2019t have to pay for private mortgage insurance if you make a down payment of at least 20 percent<\/a> of the purchase price of the home.<\/p>\n\n\n\n

Private mortgage insurance is a type of insurance that protects your lender in the event you default on your loan. You have to pay extra for PMI, so avoiding it is a good way to keep your costs as low as possible.<\/p>\n\n\n\n

One of the major drawbacks of conventional mortgages is they have stringent credit requirements. You generally need a score of at least 620<\/a>, making conventional loans a poor fit for\u00a0subprime (scores ranging from 580 to 619) or deep subprime (scores below 580) borrowers.<\/p>\n\n\n\n

Conforming<\/h3>\n\n\n\n

Every conforming mortgage must follow (conform to) the standards set by Fannie Mae and Freddie Mac<\/a>, which are home mortgage agencies backed by the U.S. government. Both agencies provide funds to banks, making more mortgages available to American consumers.<\/p>\n\n\n\n

To conform to the Fannie Mae and Freddie Mac standards, lenders must vet mortgage applicants carefully. This means you generally need decent credit to qualify. You also need an acceptable debt-to-income ratio<\/a>. This ratio compares your monthly debt payments to your gross monthly income to make sure your estimated mortgage payment isn\u2019t too high.<\/p>\n\n\n\n

The main drawback of a conforming mortgage is that there\u2019s a limit to how much you can borrow. The Federal Housing Finance Agency<\/a> has announced that the 2024 baseline loan limit for a single-family home is set at $766,550. In areas with a high cost of living, the loan limit for a single-family home is $1,149,825.<\/p>\n\n\n\n

Government-backed<\/h3>\n\n\n\n

A government-backed loan is insured by the federal government, but it\u2019s issued by a private lender, giving you the best of both worlds. One of the biggest advantages of government-backed loans is that banks view them as less of a risk than other types of loans. Therefore, you may get approved even if your credit score is too low for a conventional mortgage.<\/p>\n\n\n\n

One potential drawback is that you may have to pay for private mortgage insurance if you can\u2019t afford to put down 20 percent on a home. This increases the total cost of purchasing.<\/p>\n\n\n\n

These are the three most common types of mortgages backed by government agencies:<\/p>\n\n\n\n