Types of Mortgage Loans - Which One is the Best?

Types of Mortgage Loans - Which One is the Best?
ByNikolina Cveticanin
November 12,2021

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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But, there are also wholesale eCommerce sites that sell products in bulk, as well as stores selling digital products to companies and consumers alike. On a whole different level, dropshipping businesses work together with wholesalers, so they don’t have to handle inventory and shipping. Subscription-based eCommerce websites recurrently sell the same product on an agreed schedule. Of course, people can also offer their services on eCommerce sites. Overall, eCommerce can take many forms. As long as someone is selling or buying something via the internet - it is eCommerce. eCommerce vs. Traditional Stores There are many benefits to starting an eCommerce business over opening a brick-and-mortar shop. For example, your reach will be much broader. Expanding your business globally is also much easier to do online, as you won’t be limited to the customers in the vicinity of your physical store. What’s more, one of the many benefits of eCommerce is that your overhead costs are typically much lower. Not only do you get to avoid rent, but your transaction costs will also likely be cheaper. Also, with this type of business, you can rely on different inventory management software for help, and outsource your customer support, instead of having to hire employees. If you decide to join the eCommerce system, it's good to know that the right software can automate many aspects of your day-to-day business operations. For example, with the dropshipping model, entrepreneurs don’t even have to handle inventory or shipping. All the dropshippers need to do is forward the order to their supplier. With eCommerce, there is also no limit or rule on what you can sell. Just like you could order an entire house to be shipped to you by mail via a catalog back in the day, the same goes for eCommerce. Golf clubs, children’s Halloween costumes, plants, or candy - if you can think of it, there’s someone on the internet who’ll want to buy it. Speaking of customers, starting an eCommerce business means earning regulars quickly, thanks to the wide selection of software that can help you establish a connection with your customers. There are also tools to provide excellent support to your buyers and have them rely on you for your product or services for as long as you are in business. However, there are also cons to this type of selling. It takes a bit of a tech-savvy customer to shop online, which narrows the customer base slightly. Also, people might feel reserved about shopping online because they can’t touch or see the product before purchasing. Lastly, there is also the lack of personal shopping experience that some people appreciate. Lastly, the biggest issue is security: eCommerce stores are often targets for hackers, and your customers’ personal and payment data can be in danger unless you introduce strong safety measures. How to Start an eCommerce Business Starting this type of business is no mean feat. You’ve got many things to check off your to-do list before the launch: The first step is, of course, figuring out what you would like to sell. Are you going to offer physical or digital goods, or your services? How will you obtain the products - are you manufacturing them yourself or relying on a wholesaler for your inventory? Once you have these basic questions answered, it is time to research the competition and their prices, and crunch the numbers. This will also allow you to see how saturated a particular niche is and find out what you can do better to rise above other eCommerce companies. It will also give you a great insight into the prices you can expect to charge and pay for running your store. You should use this information and the information on how much it will cost you to fill your inventory to gauge your margins. If the idea is viable, and there is a market, then it is time to start working on your store.  How to Build Your eCommerce Store Typically the first step is to define your eCommerce store’s name. You should have a domain name pinned down before you get down to building the site. Your domain name should match your store's name, and should be descriptive of what you’re selling, so take your time with it. You also want it to be memorable and, most importantly, unique. Building your store is the next step. You can approach this by using an eCommerce website builder or relying on an eCommerce platform to help you get set up. Your store should be easy to navigate, have detailed descriptions of the products, excellent visuals, and a simple payment process. Making your eCommerce web design as memorable as possible and adding as many payment options as possible is a good idea. You should also consider adding features that will help you maintain and promote your store as effortlessly as possible. For example, tools for promo codes or options to start eCommerce sales without changing the price for each product manually. Once your store is complete, it’s time to find your customers. Start by working on your SEO first, then start advertising. There are many marketing approaches you could take, from social media and email marketing, to paid ads. Which one will work best depends entirely on what kind of product or service you’re selling and who your target customer is. Understanding who your perfect customer is will help you narrow down your eCommerce marketing to-do list, and significantly increase your revenue. Even after the launch, your job is not done. You need to keep an eye out on your store’s KPI, conversion rates, and overall performance at all times, and look for room for improvement. You might need to find cart-abandonment solutions, or improve your support system. You’ll also have to manage inventory, negotiate with wholesalers and suppliers, and provide support to your customers. And if you want to have many new customers at all times, marketing never stops, either.
By Vladana Donevski · November 04,2021

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