There are many different mortgage types available. The main four: Conventional, FHA, VA, and USDA are listed below and make up the majority of home lending in the United States. Each mortgage type has its advantages and may be more or less appropriate for your use depending on your needs. Like tools for the same job, some are better matched for a particular situation, and some are more expensive than others. A few characteristics of each of the four major loan types are listed below. Once you have some general knowledge of the different types of mortgages available, discuss your options with a trusted mortgage professional to help determine which type of financing is best suited for your situation.
CAUTION: Regardless of which program you choose, ask your loan originator for a Loan Estimate to make sure you are not overpaying for their service. Be cautious of extra offers and side-shows like discount coupons and flashy offices filled with fine furniture, shrimp and chocolate as you meet with your lender. Remember, those who “win” you with extras will charge you for the extras in the end!
Conventional Conforming and Jumbo Mortgages
Conventional mortgages are the plain vanilla product of the mortgage world. They include conforming mortgages (loan amounts up to $424,100*) and jumbo mortgages (loan amounts above $424,100*). The chief advantage to conventional loans is the possibility to pay no mortgage insurance with a 20% or greater down-payment or equity position. And when mortgage insurance is charged for conventional mortgages, it is typically less expensive than that which is required for FHA and some VA mortgages. Conventional mortgages are an excellent choice for those with medium to high credit scores. These mortgages work especially well for those who have 20% or more for down-payment or equity or those who would like for their mortgage insurance to drop off automatically once their equity position reaches 20%.
TIP: Always compare long term annual percentage rates (the number which includes all lender required closing costs and mortgage insurance) as you decide which type of mortgage you will apply for.
*In some high cost areas the conforming limit is higher than $424,100.
FHA (Federal Housing Authority) mortgages are insured by the Federal Government, providing opportunities for those who might not otherwise be able to purchase or refinance a home. FHA guidelines for approval are more lenient than conventional guidelines relating to credit score, job stability, co-signers, and debt to income ratio. Caution: FHA mortgage insurance can be pricey, usually requiring 1.75% of the mortgage amount to be paid as a fee or financed into the new loan amount at closing, with an additional annual mortgage insurance cost of .85% of the mortgage amount paid on a monthly basis.
FHA application checklist add-on (use in addition to purchase or refinance checklist)
VA (Veterans Administration) mortgages are reserved for those who have served in the US armed forces. No down-payment is required for a VA mortgage, making VA mortgages attractive to those with limited cash. Mortgage insurance (the VA Funding Fee) may be paid in cash or financed into the mortgage amount at closing. No monthly mortgage insurance is collected for VA mortgages.
TIP: Disabled veterans are given preferential treatment with mortgage insurance reductions based on their level of disability.
VA application checklist add-on (use in addition to purchase or refinance checklist)
USDA mortgages are administered by the United States Department of Agriculture and are offered in rural communities. No down-payment is required, and closing costs can often be financed into the mortgage amount at closing. Mortgage insurance is paid upfront, with no monthly mortgage insurance requirement after closing. USDA mortgages have property type and location restrictions. Ask your mortgage professional to help you determine whether a specific property is eligible for USDA lending.