Types of Mortgage Loans - Which One is the Best?

ByNikolina Cveticanin
March 01,2022

If you’re thinking about settling down and finding your dream home but don’t have enough cash for that just yet, you might consider getting a mortgage. In 2020, 842,000 houses were sold in the United States, and realtors had their hands full. Some of them used various CRM software to keep track of all the properties and help everyone find their dream home.

Choosing the right type of mortgage can save you a lot of money, which is why it’s so important to understand how mortgages actually work. There are various types of mortgage loans, and the best option will depend on your current circumstances and future plans. Now let’s see what are the possibilities you have and how do they differentiate.

What is a mortgage loan?

Before we continue, let’s go through some basics to see what a mortgage is.

A mortgage is a type of loan that helps you buy or refinance a home. Although mortgage rates had a serious drop earlier this year, many people still do not have enough cash to purchase a home, and a mortgage might be their only solution. As a mortgage is a long-term commitment, it’s crucial to take time and think about it carefully. 

Different types of mortgage loans

As there are multiple options for mortgages, you should do the proper due diligence before choosing one. Ensure to understand the key advantages and disadvantages of each type of mortgage and the requirements they come with. Generally speaking, there are two main types of loans:

Conforming Loans Non-conforming loans
  • Conventional mortgages
  • Fixed-rate mortgages
  • Adjustable-rate mortgages
  • USDA loans
  • FHA loans
  • VA loans

Conforming loans

Conforming loans are the ones that can be acquired by Fannie Mae or Freddie Mac, two government-sponsored enterprises (GSE) that buy and sell most conventional mortgages in the US. If a loan meets specific requirements set by the Federal Housing Finance Agency, it can be purchased and then resold through a mortgage by one of these institutions. There are different types of conforming mortgage loans; however, they all include the same requirements. They need to be below the maximum dollar limit, they can not be federally backed, and they must meet the lender’s specific criteria. The maximum dollar limit is the total amount of money an applicant is authorized to borrow. In 2021, in most parts of the US, the maximum conforming loan limit is $548,250 for one-unit properties.

Conventional mortgages

Conventional mortgages are the most common type of mortgage. To be more precise, they are a type of conforming loan funded by private financial lenders. Conventional mortgages are a popular choice as they don’t have strict income regulations like some other loans do. All types of conventional mortgage loans require a credit score of at least 620. In case you have a down payment of 20%, you are not obligated to buy private mortgage insurance (PMI). But if you still need to pay for the PMI, a good thing to know is that conventional loans usually have lower mortgage insurance rates than the other types of loans. So to summarize, here’s what you should know before getting a conventional mortgage.

Advantages of conventional mortgages:

  • To qualify for the loan, you need a down payment of just 3%.
  • The overall borrowing cost is less than with unconventional loans.

Although it’s the most popular out of all types of mortgage loans, conventional loans do have a few downsides, too.

Disadvantages of conventional mortgages:

  • The minimum credit score you need is 620.
  • All down payments lower than 20% require you to buy PMI.

Fixed-rate mortgages

Fixed-rate mortgages are the ones that have a fixed interest rate throughout their whole duration. They are a great option for people that know (or want to know) exactly how much they’ll have to pay each month. This information can help people make a long-term budget as the monthly payments are already set. There are multiple types of fixed-rate mortgage loans depending on the repayment period you choose, but most are two-year or five-year deals. The longer the repayment period, the higher the interest rate will be, so that is something to think about.

Advantages of fixed-rate mortgages:

  • Monthly payments don’t change over time, which helps borrowers plan a budget and stick to it.

Disadvantages of conventional mortgages:

  • Interest rates might be higher depending on your mortgage period, and you may end up paying more in interest over time.

Adjustable-rate mortgages

Adjustable-rate mortgages (ARM) are the opposite of fixed-rate ones. They are loans with interest rates that fluctuate depending on how the market changes. To compare the types of mortgage loans, let’s see how an ARM looks and what its requirements are.

All ARMs start with an introductory period of fixed interest which normally lasts for five, seven, or ten years. After this period ends, your interest rates may vary based on the market trends. ARMs, however, include rate caps to give you an insight into how much your rate can change over time, and they protect you from rapidly increasing interest rates.

Advantages of fixed-rate mortgages:

  • The introductory period has below-market rates.

Disadvantages of conventional mortgages:

  • Monthly payments can significantly increase along with the rate.

Non-conforming loans

Non-conforming loans are the ones that don’t meet conforming standards set by  Fannie Mae and Freddie Mac. If you are interested in types of mortgage loans with no down payment, you should think about getting a non-conforming loan. According to real estate stats, the average down payment for a new home is $59,880, which is a figure that many people simply cannot afford.

Non-conforming loans have less strict rules than the conforming ones, allowing you to take a larger loan than you would typically qualify for. They are also known as jumbo loans as they exceed the conforming loan limits. What’s great about nonconforming loans is that you can apply for one even if you have a lower credit score.

Financial institutions don’t like non-conforming loans as they don’t match up to GSE guidelines, and they are harder to sell. 

Government-backed loans

There are three main types of government mortgage loans: USDA loans, FHA loans, and VA loans. For each of these loan types, the government agency insures the loan amount and protects the lender in case a borrower can't repay their debt. 

Advantages of government-backed mortgages:

  • Easier to qualify for as they have less strict requirements.
  • Can allow you to save on down payments.
  • Government protection in case you cannot afford to repay a debt.

Disadvantages of government-backed mortgages:

  • Some government-backed loans come with a mortgage insurance premium, which can cause higher borrowing costs.

USDA Loans

USDA Loans are the ones issued by the United States Department of Agriculture. They are zero-down-payment mortgages for those who can’t afford a traditional mortgage. If you’re looking for a home in a suburban or rural area and you’re interested to know what types of mortgage loans are available, a USDA loan is a perfect choice for you. 

USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program, and there are three main types:

  • Loan guarantees: The USDA guarantees a mortgage issued by a participating local lender, allowing buyers to get low mortgage interest rates. In some cases, they don't even have to make a down payment; however, they will have to pay a mortgage insurance premium.
  • Home improvement loans: These loans allow homeowners to repair or upgrade their homes. 
  • Direct loans: These loans are reserved for applicants with very low income, and interest rates can be as low as 1%.

Different types of mortgage loans have different income limits you need to fulfill to qualify, and when it comes to USDA loans, those limits vary by location and household size. To become eligible for the USDA loan, you need to:

  • Have US citizenship or permanent residency.
  • Agree to a monthly payment (principal, interest,  taxes, and insurance) that’s around 29% of your monthly income.
  • Have a reliable income for a minimum of 24 months.
  • Maintain a good credit history for at least 12 months before applying for a loan.

FHA loans

FHA or 203k loans allow you to buy or refinance a home that needs work by letting you pay for the renovations over time and roll the renovation costs into the mortgage. FHA loans are considered a type of mortgage loan for bad credit, as you can qualify for it with a credit score as low as 580 and a down payment of 3.5%.

FHA loans are issued by the Federal Housing Administration, and they usually offer more relaxed qualifying requirements than other renovation loan types. They do, however, include rules on how much money you can borrow and how you can use it for renovating a property. There are two categories when it comes to FHA loans: FHA limited loan and FHA standard loan. The limited loan provides up to $35,000 for renovations but can’t be used for major structural repairs. A Standard loan is for renovations that cost at least $5,000, including major structural repairs.

As both types of FHA mortgage loans have specific requirements, let’s see how you can qualify for them. 

  • You need to have a credit score of 580, although some lenders even allow a score of as low as 500. 
  • If your credit score goes above 580, your down payment will be 3.5%. On the other hand, if your credit score is between 500 and 580, your down payment will have to be 10%.
  • Your application will probably be denied if you had a foreclosure within the past three years.
  • Max loan amount depends on the state and the area you live in, but it usually goes from $356,362 to $822,375 for a single-family home.

VA loans

When talking about what types of mortgage loans are available, we need to also look at the VA loans. These are loans issued by the Department of Veterans Affairs, and it has lower interest rates than most other types of loans. You can even buy a home with a $0 down payment.

VA loans are for current and veteran service members and their spouses. In cases of VA loans, the government is the one that guarantees for the borrower and will repay a portion to the lender in case the borrower is unable to do so. If you have served in the military and are now checking out the best types of mortgage loans for yourself, a VA loan might be just what you need. Here’s what makes you eligible for a VA loan:

  • You are a military member of a veteran that fulfills length-of-service requirements. To check these requirements, you can visit the US Department of Veterans Affairs page, which has detailed explanations.
  • You meet the minimum requirements for credit and income issued by a lender. Although VA doesn't set a minimum for the credit score, lenders can set their own standards. If you don’t meet the requirements, you might have to check what other types of mortgage loans are there.
  • You're the spouse of a service member who died while on active duty, and you have not remarried after December 16, 2003, or after turning 57. This also applies to surviving spouses of veterans who are missing in action or became prisoners of war. 
  • The property you're planning to buy will be your primary residence, and it meets the safety standards.
FAQ
What type of mortgage loan is best?

This will largely depend on your needs and budget, as every loan type has its pros and cons. We hope that our article has helped you learn about different types of mortgage loans and decide which one might suit you the best.

Is an FHA loan bad?

FHA loans aren’t bad. They actually offer lower interest rates and have low minimum down payment requirements. However, they do require FHA mortgage insurance, and they can’t be used for investment properties.

Should I get a 30-year mortgage or 15?

A 30-year mortgage has a longer term and lower monthly payments but comes with a higher interest rate. A 15-year mortgage comes with higher monthly payments, but you'll pay a lot less in interest by the time your loan ends, and you’ll be free of your loan sooner. Both types of mortgage loans have their advantages and disadvantages; it really depends on your needs and plans.

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Instead of leaning on traditional shopping methods, more and more consumers are turning to the internet to purchase items. Mobile phones play a big role here, as they provide a convenient way to shop on the go. What's more, consumers are getting more comfortable with new technologies such as AI, AR, chatbots, and voice search. These eCommerce trends in technology are changing the way we interact with eCommerce platforms and retailers. With all that said, we're confident that you now have a solid understanding of the current eCommerce landscape. Just remember to keep your eyes peeled for new trends so you can stay ahead of the curve.
By Danica Djokic · September 15,2022
As a business owner, you are likely responsible for overseeing all aspects of your company’s operations. This includes setting your own salary. This decision can be difficult to make, especially if you’re not sure what’s standard or how to determine what’s appropriate for your situation. In this article, we’ll discuss some factors you should consider when deciding how much to pay yourself as a small business owner. What To Consider When Setting Your Salary Setting your own salary can be daunting, especially if you’re a freelancer or small-business owner. After all, you need to make enough money to cover your expenses and earn a profit, but you don’t want to price yourself out of the market. So, what factors should you consider when paying yourself from your business? Business Structure One of the first things you should consider is your company’s business structure. Are you a sole proprietor? Do you have a business partner? Are you an S corp? Your company’s business structure will affect how much money you take home and how much in taxes you need to pay. For example, if you’re a sole proprietor, you’ll likely take home less money than if you’re running a corporation because you’ll be paying taxes on both your business income and personal income. On the other hand, if you’re running a corporation, you’ll only be taxed for your corporate income. This means that more of your business profits will stay within the company, which can be reinvested or distributed to shareholders. Business Expenses Another factor to consider when paying yourself as a small business owner is your business expenses. How much does it cost to run your small business? You should consider expenses like rent, utilities, payroll, and marketing. You’ll need to make enough money to cover these costs, plus your personal living expenses. One common mistake small business owners make is not accounting for all of their business-related expenses. Make sure you have a clear understanding of all the costs associated with running your business before you start setting your salary. Personal Living Expenses In addition to business-related expenses, you also need to account for your personal expenses, such as housing, food, transportation, and health care. Again, one common mistake people make is not accounting for all their personal expenses when calculating the business owner’s salary. Industry Standards Another factor to consider is industry standards. What do other businesses in your industry pay their employees? This will help you determine a reasonable salary for yourself as the business owner. Of course, you don’t want to undervalue your services.  Ultimately, setting your salary comes down to determining what you need to earn to cover your costs and make a profit and then finding the right balance between pricing yourself too high and too low. By taking the time to consider all the relevant factors, you can ensure that you set a fair and competitive price for your services. How to Calculate Your Owner’s Pay You should consider a few balance sheet items when calculating your salary as a small-business owner. These include your monthly net income, all business-related taxes and fees, and business expenses.  According to some small business revenue statistics, 86.3% of small business owners earn less than $100,000 a year. However, this does not mean you must stay within this bracket. Below are some steps you can take to get a clear picture of a small business owner’s salary and how to calculate it yourself. Calculate Your Monthly Net Income Your monthly net income is the total revenue your business brings in minus any taxes or fees. This number can fluctuate from month to month, so it’s important to take an average over a period of time to get an accurate number.  Next, you’ll need to subtract all business-related taxes and fees. This includes income taxes, self-employment tax, and any other business-related expenses. Once you have your monthly net income minus taxes and fees, you’ll be left with your profit.  Calculate Your Tax Savings The next step in calculating owner pay is determining your tax savings. This includes any deductions you can take for business expenses, home office expenses, and health insurance premiums. You can consult with a tax professional or use a tax calculator to get an accurate number. Once you have your tax savings figured out, you can add this amount to your monthly net income to get your total monthly compensation. Calculate Your Business Expenses The final thing you’ll need to consider when setting your salary is your business expenses, including office rent, utilities, supplies, and employee salaries. Once you know how much it costs to run your business each month, it will be easier to calculate how much to pay yourself as a small business owner. One mistake many small business owners make is not accounting for their salary when calculating their business expenses. This can lead to severe financial problems down the road, so be sure to include yourself in the equation. By following these steps, you should be able to come up with fair and reasonable compensation for yourself as a small business owner. Remember to avoid common mistakes, and you’ll be on your way to success.  Ways To Pay Yourself As a business owner, you have two options: Either pay yourself a salary or take distributions from your small business. Here are the pros and cons of an owner’s draw vs. a salary.  Paying Yourself a Regular Salary To pay yourself a regular wage, just like you would an employee, you’ll need to set up payroll for your business and withhold taxes from your paycheck. One advantage of this method is that it can help you separate your personal and business expenses and make it easier to track your business expenses come tax time. The downside of drawing a salary is that it’s subject to payroll taxes, which can eat into your earnings. Additionally, if you have a slow month or two, you may find yourself struggling to cover your personal expenses if you’re relying solely on your business income. An Owner’s Draw If you are self-employed and paying yourself a salary, an owner’s draw is another method you can use. This method is often used by small business owners with irregular or variable income. With an owner’s draw, you simply draw money out of your business bank account as needed to cover your personal expenses. One advantage of this method is that you don’t have to worry about payroll taxes. Additionally, it can give you more flexibility regarding how much money you take out of your business each month. However, one downside is that it can be challenging to track your small business expenses come tax time. So, which method is right for you? How to pay yourself as a sole proprietor? Ultimately, it depends on your circumstances and the needs of your business. If you have a stable and predictable income, having a regular salary may be the best option. However, if your income is variable or unpredictable, an owner’s draw may be a better option. Final Thoughts Paying yourself as a business owner can be a tricky task. And there’s no universal rule on how much business owners should pay themselves. However, by following some simple guidelines, you can ensure that you are fairly compensated for your work without putting your business finances at risk.  What’s most important is to find a method that works for you and your business. And, of course, to avoid any common pitfalls.
By Nikolina Cveticanin · September 14,2022

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