Traditional Loan Options

Posted by Laine Smith on 6/6/14 10:04 AM

Topics: Home Buying

There are an infinite amount of loan types and options for today’s borrowers, which brings up the age-old question: “Which mortgage is right for me?” Fixed or adjustable rate? 30-year or 15-year term? Government-backed or conventional? Buying a home is a huge financial commitment, and you should explore what option will fit your budget and future plans. When looking for the right mortgage loan, you will essentially be choosing loan options within two different types of financing: government-backed or conventional financing.

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Government Loans

There are three types of government-backed loans: FHA, VA and USDA. Government financing aims to assist homebuyers who may not otherwise qualify for conventional financing. Government loans typically allow little to no money down, gifted down payments and have more flexible credit guidelines.

FHA loans finance single-family purchases of new or existing homes. It’s a popular option for first-time homebuyers because of the low 3.5 percent down payment requirement, which can be gifted. Because FHA loans do not require a 20 percent down payment, borrowers must pay an upfront mortgage insurance premium, which can be structured into the loan, and an annual premium that is paid monthly. There are also Adjustable Rate Mortgage (ARM) options available with FHA that give you flexibility with interest rates available.
The USDA strives to assist homebuyers purchase homes in eligible rural areas through their Guaranteed Rural Development Loan (RD). An RD loan allows for 100 percent financing on top of low mortgage insurance premiums. Income limits and property eligibility apply.
VA loans provide financing to eligible United States veterans. In most cases, borrowers benefit from no down payment, no mortgage insurance premiums, the right to prepay without penalty and closing costs comparable to other financing options.

Conventional Loans

A conventional loan is financing that is not insured or guaranteed by the federal government. A conventional loan adheres to guidelines set by Fannie Mae and Freddie Mac. The following are ways that conventional loans differ from government loans:

  • Require minimum 5 percent down payment
  • Interest rate varies based on credit score and loan term
  • Mortgage insurance premiums vary based on down payment amounts

Conventional loans also give borrowers the option of having a fixed or adjustable rate mortgage, as well as choosing a loan term.

Adjustable Rate Mortgage (ARM)
Adjustable Rate Mortgages have interest rates that are fixed for a specified term (3, 5, 7 or 10 years) and then adjust annually based on changes in a pre-selected index. ARM’s have lower interest rates during the fixed initial term than fixed rate mortgages.
Fixed Rate Mortgage (FRM)
Payments and interest do not change for the term of the loan in a fixed rate mortgage. No matter what the term of a FRM, the loan is fully amortizing. The 30-year fixed is the most common FRM, but many term options are available.

Loan programs are not one-size-fits-all products. Talk to one of our Mortgage Bankers about which loan is the right option for you.

Looking for more information on buying a home? Our Mortgage 101 Handbook is the ultimate guide for First Time Home Buyers.

Download: Mortgage 101 Handbook

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