Types of Mortgage Loans: Making the Most Out of Your Mortgage
ByNikolina Cveticanin
December 16,2022
Buying a house is one of the turning points in anyone’s life and certainly one of the biggest purchases they’ll ever make. And as much as it’s fulfilling, finding a perfect residential property can be extremely stressful, especially if you don’t know what your options are.
Selecting the right mortgage program is one of the crucial steps in this process, which is why we decided to let you know what types of mortgage loans exist, how they work, and what their key benefits are to help you make a smart decision.
Different Types of Mortgage Loans
The national mortgage debt keeps on pilling up, and since the pandemic, it has been on a constant rise. Statistics have shown that by April 2022, mortgage debt in the US had surpassed $11.18 trillion. These numbers prove that we must take things seriously and carefully explore all the possibilities.
If you’re a first-time home buyer, you probably don’t even know where to start looking and what to expect. So, let’s dive right into it. These are the most common types of mortgage loans.
Conventional vs. Non-Conventional Loans
All mortgage loans can be split into two main categories: conventional and non-conventional loans.
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A conventional loan is any mortgage that has been issued by a private mortgage lender and isn’t backed up by the federal government. These loans follow the guidelines based on the set of standards set by Fannie Mae and Freddie Mac, the federally backed home mortgage companies created by the US Congress. A conventional loan is the most popular type of mortgage loan in the US for those borrowers who are able to qualify for it.
Alternatively, non-conventional loan offers are tailored for borrowers with poor credit scores who can’t otherwise qualify for conventional loans. They also usually require private mortgage insurance, as they are considered riskier. Non-conventional loans are backed by government agencies and include loans supported by the Federal Housing Administration (FHA), Veterans Administration (VA), and the US Department of Agriculture (USDA).
Conventional Mortgage Loans
Generally, conventional mortgage loans require a credit score of at least 620 and a 3% down payment. However, if a borrower makes a down payment of 20%, they are not obligated to pay the private mortgage insurance, which is a big plus. Now that we know the basics, let’s check out the different types of conventional mortgage loans and how they work.
Conforming Conventional Loans
Conforming loans are those that fall under the loan limits set by the Federal Housing Finance Agency and meet additional loan standards set by Fannie Mae or Freddie Mac.
These loans can not exceed a conforming loan limit determined by the FHFA, which is how they got the name in the first place. The limit changes yearly and is determined based on the House Price Index report that tracks the average increase in home values over the previous year. For 2022, the conforming loan limit is $647,200 for most parts of the US.
Non-Conforming Conventional Loans
Non-conforming loans, also known as jumbo loans, exceed the limit set by the FHFA or use standards different from those set by Fannie Mae and Freddie Mac. Out of all types of conventional mortgage loans, these are the riskiest ones as they go over the maximum loan limit. That is why they usually have strict qualification requirements.
Fixed-Rate Mortgages
Fixed-rate mortgages have the same interest rate throughout the life of the loan. And that’s their main advantage. You always know your rate, so there will be no surprises regardless of external economic conditions.
However, there is one principal thing to keep in mind. If you choose to go for a fixed-rate mortgage with a longer repayment period, you will have a higher interest rate than you would if you opt for a short-term loan.
Adjustable-Rate Mortgages
Adjustable-rate mortgages are the opposite of fixed-rate mortgages, and their interest rates can vary a fair bit over the span of the loan term. An adjustable-rate mortgage usually has an introductory period with a lower interest rate, after which the rate increases.
As much as that initial interest rate may seem tempting at first glance, you should know that it most certainly will go up as time goes on. With that in mind, you might want to read up on the fine print and calculate total potential costs or check what other types of mortgage loans are available.
Portfolio Loans
Portfolio loans are a type of mortgage originated by the portfolio lender. Instead of selling the mortgage to another company, the lender issues the loan and keeps it within their range of investment holdings. This way, the mortgage doesn’t have to meet the rules set by Fannie Mae and Freddie Mac, making it easier for borrowers to qualify.
Non-Conventional Mortgage Loans
We have already noted that non-conventional mortgages are made for borrowers with low income or who wish to apply for a loan with a low down payment or none at all.
According to the recent housing statistics, the average down payment for a new home in 2020 was $59,880. That is far above the price range of many US citizens, who instead had to look for cheaper alternatives.
Non-conventional mortgages are usually used by borrowers who were denied conventional loans due to insufficient cash reserves, a history of bankruptcy, or because they are self-employed. So, let’s see what types of government mortgage loans there are.
FHA Loans
FHA loans are the ones insured by the Federal Housing Administration. This means that the FHA doesn’t issue them directly, but if you default on your mortgage, the agency will compensate the private lender. Since it is less risky for them, mortgage lenders usually offer more favorable terms here than with conventional mortgages.
To qualify for the FHA loan, you should have a credit score of at least 500. If your score is between 500 and 579, you will likely have to make a down payment of 10%. But, if it is 580 or higher, your down payment can be as low as 3.5%. Note that all Federal Housing Administration loans require mortgage insurance, so you should also plan for that extra cost.
VA Loans
VA loans are backed up by the US Department of Veterans Affairs and are meant to help military service members, veterans, and their eligible family members find a home. Similar to getting an FHA loan, the federal government will compensate the lender if you default on your VA loan monthly payments. However, there are some differences.
If you’re after the types of mortgage loans with no down payment requirements, the VA loans might be an excellent choice, as they require no upfront cash and don’t have mortgage insurance. You are only required to cover the VA funding fee, which must be paid upfront.
USDA Loans
If you’re considering purchasing a residential property in a rural area, a USDA loan might be just what you are looking for. The US Department of Agriculture offers these government-backed mortgage programs for people with low and middle incomes. The best thing about USDA loans is that they usually don’t require any down payment and have fixed interest rates.
To qualify for a USDA loan, the borrower needs to live in an area with up to 35,000 people and can’t make more than 115% of the area’s median income. If you meet all of these criteria, you can apply for the mortgage directly with the USDA Rural Development office.
HUD Section 184 Loans
Lastly, there’s another type of mortgage loan for those with bad credit, the HUD Section 184 mortgage. These mortgages are guaranteed by the HUD’s Office of Native American Programs. They are designed for American Indian and Alaskan Native families, Alaskan villages, tribes, or tribally designated housing entities struggling to purchase a home.
The mortgages don’t have any requirements in terms of minimum credit score and usually come with a low down payment. However, there are some limitations borrowers should be aware of. HUD Section 184 loans are limited to single-family housing and fixed-rate loans of up to 30 years.
Final Thoughts
Now that you’re more familiar with all the mortgage types on offer, you should have a much easier time picking one. Just make sure to do your due diligence to find a property that suits your needs the best. Remember to read the fine print and make timely mortgage payments to avoid any surprises in the form of additional costs.
FAQ
How many different types of mortgages are there?
There are multiple types of mortgages you can apply for. Depending on your personal needs and creditworthiness, options can include a fixed-rate loan, an adjustable-rate loan, a conventional loan, an unconventional loan, a jumbo loan, a balloon mortgage, or a reverse mortgage.
It is essential that you compare all these types of mortgage loans and understand all the requirements and terms before applying for any of them.
What is mortgage insurance?
Mortgage insurance is a precautionary measure that protects the lender in case the borrower defaults on their monthly payments. This insurance is usually required on FHA and USDA loans when the down payment is less than 20% of the home’s purchase price.
As these are high-risk situations, lenders need to protect their interests, which is where mortgage insurance comes into the picture.
Is an FHA loan bad?
FHA loans aren’t bad. They’re just a bit unpopular among borrowers as they require mortgage insurance and have some limitations regarding properties you can purchase.
The property you intend to purchase with an FHA loan must meet basic health and safety requirements, and it can’t be an investment property. So, if you’re looking to buy one, you might need to consider other types of mortgage loans.
Should I get a 30-year mortgage or 15?
Well, it depends. If you wish to have lower monthly payments, a 30-year mortgage might just be a better choice. However, if you’re looking to save on interest, a 15-year mortgage term is definitely a recommended option, as you will repay it sooner and pay less in interest overall.
More From Our Blog
What is due diligence in real estate? Many struggle to find the answer to this question, especially those who don’t have much or any experience in home buying. It’s a well-known fact that there are plenty of steps that need to be taken before the final contract is signed. But what exactly are those steps and how to go about performing them is an entirely different story. Due to this, we’ve decided to create a simple guide that’ll hopefully make this a far less intimidating and stressful process.
What is Due Diligence in Real Estate?
Due diligence in regard to real estate can be defined as thoroughly researching the property in which you are interested. Shopping for a house or office space involves high stakes, so no detail should be overlooked. Therefore, aside from performing the standard inspections and appraisals, you should always do your homework, and that means doing some investigating on your own.
We have to mention that some experienced real estate investors choose to skip certain parts of due diligence, which is fine since they have the knowledge to do so. However, those purchasing their very first home or trying to get into the business of property investing should carefully follow a real estate due diligence checklist, such as the one we’ve prepared below, and resist the urge to rush any of the listed tasks.
Due Diligence Checklist for Buying Real Estate
Shop around.
House hunting may be interesting at first but it can get quite tiresome after a while, causing some to look at a minimal number of options. Without seeing as many properties as you can, you can’t be certain that your final decision is the best one you could make. Also, keep in mind that it’s pretty easy to get the wrong impression of the real estate market by looking at homes in a single area.
Investigate the surroundings.
Our next piece of due diligence real estate advice concerns analyzing each and every neighborhood thoroughly. You can learn a lot about a property’s value from its surroundings. The area’s demographics, the state of the homes in it, and crime rates can tell you if the value of the real estate you’re interested in is going up or down.
Organize inspections.
Once you’ve done your own research, you should call in the professionals, experts who can spot potential problems you may not be able to. There are many types of inspections and, depending on your budget and due diligence deadline, you should try to organize as many of them as possible.
Here are the most common types of inspections:
General inspection: A general inspection report should include information on the state of the walls, floors, staircases, roof, heating and cooling, foundation, porches, plumbing, electrical installation, and the like. These inspections are only visual and are required by most lenders.
Wood-destroying organisms inspection: Some lenders will also ask for a WDO home inspection. The inspector should tell you if the structure has any wood rot caused by either termites or moisture and how severe the damage is. Even if your lender doesn’t request it, we suggest you don’t skip this real estate due diligence task as wood rot-related repairs can be costly.
Lead-based paint inspection: This type of inspection is mandatory for any house built before 1978. If the seller knows that lead-based paint has been used in or outside of the home, they are obligated by law to inform you about it.
Radon gas inspection: Not many people know that a radon gas inspection even exists, but if you have the time and money, we would definitely recommend that you have it done. According to the United States Environmental Protection Agency, radon, a radioactive gas, causes thousands to get lung cancer every year. Therefore, although a radon test usually isn’t a part of a typical real estate due diligence process, you might want to consider it.
Defective drywall inspection: Another rare inspection is the defective drywall test. It’s used to determine whether or not a home was built with defective drywall, which was manufactured in China, imported to the US, and used in construction between 2001 and 2009. Not only do the high levels of sulfur in the contaminated drywall affect the quality of the structure but they can also lead to respiratory health problems.
Arrange appraisals.
If you’re planning on obtaining your funds through a crowdfunding platform or from a bank, you should expect the lenders to request an appraisal. Even those who don’t plan on taking out a loan should think about adding an appraisal to their due diligence real estate checklist because it determines the realistic value of a property and, as such, can keep a seller from attempting to inflate the property’s price.
Compare rates.
When looking for property financing, you mustn’t forget to take the time to compare interest rates from multiple lenders. The first few offers that you get may turn out to be similar, but don’t let that stop you from exploring further. In the long run, even the smallest of differences could end up saving you a good amount of money.
Assess the property’s eligibility for insurance.
Before your due diligence deadline passes, you should make sure that the property you intend to purchase meets the minimum standards of insurance companies. There are three main types of insurance that we’d like to mention here:
Homeowners insurance: If you plan on living in the property you bought, you should consider getting a homeowners insurance policy. It protects both your home and the assets inside it from unforeseen circumstances such as tornadoes, fires, or thefts. Your insurance rates will be higher if your property is, for instance, old or in a flood zone, so keep that in mind during your property due diligence assessments.
Landlord insurance: No matter how careful you are when screening your potential tenants, accidents happen, which is why we’d advise all those intending to rent their properties to buy landlord insurance. This type of coverage provides financial protection if your property is damaged, becomes unavailable due to a catastrophic event, or if someone gets hurt while living in or visiting it.
Vacant property insurance: Vacant property insurance is typically the most expensive of the three, but if you’re planning on flipping a property, you might want to look into getting this kind of policy. Empty homes are at high risk of theft, vandalism, and fire.
Perform a title search.
A key part of due diligence in real estate is doing a title search. During this process, public records and other documents relating to the property are examined to determine the property’s legal ownership and if any lines or claims are associated with it. If you fear that your title search might not uncover every single issue, you might want to think about purchasing title insurance. Title insurance covers disputes that occur both during and after a sale.
Check the restrictions of the homeowner association.
Owners of properties located in communities managed by homeowner associations have to follow the rules these organizations make and enforce. Whether you’re conducting residential or commercial real estate due diligence, you should remember to check what these rules are. Although this may not seem like a very important step to you, know that some HOAs impose extremely strict requirements, which you may not wish to adhere to.
Consider getting some assistance.
Navigating the home buying process and all the paperwork that comes with it shouldn’t be taken lightly, especially if you’ve never done anything similar before. To avoid getting overwhelmed, you might want to consider hiring a real estate attorney. Note that online legal firms tend to be more affordable than their brick-and-mortar counterparts.
As you can see, the answer to the question of “What is due diligence in real estate?” is quite a long one. If, while reading it, you felt like there was far too much to remember, there are some great free task management apps you could download to help you keep track of everything.
By Isidora Alimpic ·
February 24,2022
If you’re moving for the first time into a community with a homeowner association, you must be wondering how much it’ll all cost you. What do HOA fees cover, are they negotiable, and how are they collected? Do you have to pay HOA fees even if you aren’t using the services it offers, and what happens if you don’t pay them? We’ll guide you through all the details, explain HOA rules thoroughly, and provide an insight into how a homeowner association functions.
Understanding a Homeowner Association
Homeowner associations are formed within communities, buildings, or neighborhoods where properties are owned by multiple parties. The aim of these organizations is to create and enforce rules regarding the properties within their jurisdiction regarding the cleanliness and the condition of the properties and their uniform appearance. What else is a homeowners association in charge of? An HOA can also be in charge of minor tasks such as seasonal lighting, snow removal, etc.
HOAs have the legal authority to require residents to abide by the terms of the contract they signed. If the property you bought was previously in an HOA, in most cases, you’ll automatically become a member of it. That’s why getting acquainted with the HOA’s rules should be a part of your due diligence when buying a home. Failing to abide by these rules can lead to penalties such as monetary fines, the restriction of some privileges, or even legal actions.
How Much Will It All Cost You?
Let’s shed some light on homeowners association fees. Depending on the neighborhood, the monthly or annual HOA fees members are required to pay usually range from $200 to $400 per month. In luxury neighborhoods, fees can go up to $10,000, while HOAs in less attractive areas can have lower-than-average fees of about $100 per month.
The prices vary depending on the city or area, too. According to a Trulia study from 2015, the lowest were in Warren, Mich ($218 per month) and the highest in New York City ($571). The same study established that older buildings entail a higher average fee due to more extensive maintenance requirements.
What Do Homeowner Association Fees Cover?
Before we get into detail, please note that this isn’t a definite list. Different HOAs offer different services to their members, so you should always check the rules of the particular HOA your (prospective) home belongs to. In this section, we’ll discuss the most common, basic services.
Communal Areas Maintenance
The homeowner association will usually cover the expenses of repairs in common areas, lawns, roads, and pavements maintenance, as well as snow removal. What else do HOA fees cover? It can be the maintenance of common areas, such as patios, lobbies, elevators, landscapes, and many other things.
City Services
Sometimes, HOAs cover certain communal utilities: trash removal, electricity for communal areas, water and sewer fees.
Pest Control
Residents of condominiums often struggle with cockroach infestations, and single-family houses sometimes have to deal with rats, termites, squirrels, or even rabbits that can seriously damage gardens. Having your HOA deal with pest control - especially roaches in buildings - is only logical because these insects spread from one unit to another, so getting rid of them has to be a joint effort if it’s to be successful.
Insurance
Condos association fees won’t cover the insurance costs for your humble abode but only for the communal areas and the exterior of the building. In case, for example, your condominium and/or the surrounding property is damaged in a natural disaster, you can lean on your HOA. But make sure to purchase homeowner’s insurance to protect your home.
Additional Amenities
We’ve listed some essential services covered by HOA fees. However, those who reside in more luxurious properties might get additional perks included in the (higher) price, such as security services or access to spas, gyms, tennis courts, swimming pools, community clubhouses.
Do You Have To Join an HOA?
After learning the answer to the question “What are HOA fees?” your next question is likely whether HOA membership is mandatory. With more than 350,000 homeowner associations in the US running about 53% of all properties, future homeowners don’t have much choice unless they’re lucky enough to find a home within the jurisdiction of a voluntary HOA.
Voluntary HOA
If you reside in a community with a voluntary HOA, you don’t have to sign up for its services. By refusing the HOA payment, you probably won’t have (free) access to communal facilities or community clubs reserved for members only. On the bright side, apart from not having to pay the steep fees, you won’t have to abide by the rules imposed by the association.
Mandatory HOA
If typing “What do HOA fees cover” into the search box is what landed you here, it’s more likely than not that your real estate is in an area with a mandatory HOA. That means you will have to pay a monthly fee and abide by its rules. The good side of the situation is that you won’t have to deal with maintenance and bureaucracy yourself. However, painting your house in loud colors, keeping a zoo at home, or renting your apartment to just anyone without going through a thorough tenant screening process first probably won’t be an option.
Breaking HOA Rules
An average HOA fee is a major budget item for most families, so many people are tempted to just skip their payments. A word of caution if you’re thinking about dodging the fees and/or rules of your HOA: Penalties against rule-breakers can be harsh and might lead to legal action against the homeowner or even foreclosures of the property.
To avoid all that unnecessary trouble, take enough time to study the rules of your future home’s HOA. According to real estate statistics, home buyers spend 10 weeks on average searching for a new home, so there’s plenty of time to examine all the possible sanctions and restrictions a HOA might impose.
By Danica Djokic ·
March 01,2022
Becoming a homeowner is one of the best experiences one can have, but purchasing a property comes with many decisions. Finding the right home to fit your lifestyle and budget in your preferred location can seem like mission impossible. Add to that the interchangeable terms for property types, and the confusion can become mind-numbing.
We’ll focus on handling one of those issues and explain the difference between a townhouse and a condo. We’ll also briefly cover other types of properties so you can walk into a realtor’s office with the knowledge and confidence you need to find the perfect place to start your new life as a homeowner.
Keep in mind, though - real estate is one of those niches where definitions can vary even in theory; in real life, the line where a condo ends and a townhouse begins is even more blurred. However, once you have the basics, you’ll be able to tell one from the other much easier.
What Is a Condo?
In the realtor playbook, a condominium is a style of joint ownership - as a new owner, you’d be purchasing a piece of a building, which would give you exclusive access to some of its areas. Having a condo means living in an apartment building, but you own the apartment instead of renting. You also share joint ownership of the whole building with other owners, including the gym, pool, grounds, or any other common areas the building has.
This solution is typically cheaper than the others, but it can also be limiting for some people. Living in a condo makes you a part of a community, but where that will land on the list of pros and cons of buying a condo depends solely on you.
What Is an Apartment?
Now, you’ll often hear the word ‘apartment’ used interchangeably with ‘condo,’ which can lead to confusion. However, the term ‘apartment’ typically refers to the individual units that make up a specific style of building. These units are usually occupied by tenants based on a lease.
In practice, an apartment building is owned by a person or business that rents the units to carefully screened tenants and oftentimes relies on property management software or a company on call. Even though this is the main difference between a condo and an apartment, it isn’t always the case, and there are exceptions to it, too.
You usually can’t tell whether a building consists of apartments for rent or if it’s part of a condominium just by looking at it, as they’re built more-or-less the same. Some modern condos look more like multi-level townhouses, which only adds to the confusion. Luckily, this is where brokerages and real estate agents can help, as it takes them a quick look into their real estate CRM to find precise information about the property you might be interested in.
As mentioned before, there are always exceptions, but the main difference in the condos vs. apartment struggle lies in who owns the units in a building - those living there or landlords.
What Is a Townhouse?
A townhouse is a type of building: To first-time homebuyers, it’s easiest to explain by saying, “think row houses.” A townhouse shares one or more walls with other townhouses, but the owners don’t have to worry about downstairs or upstairs neighbors. You’ll also likely get your own basement, front yard, or backyard with a townhouse.
Townhouses come with the convenience of a condo and some of the flexibility of a single-family home. With this type of property, you get more privacy than with the former, as it’s very close to owning a single-family home.
The critical difference between a condo and a townhouse is that townhouses are more expensive. On the other hand, they’re much more affordable when compared to the price of a single-family home. In other words, it’s a reasonable middle ground, which is why this option is so popular with new homeowners.
Homeowners Association (HOA)
It is essential to take a moment here to discuss the role the Homeowners Association (HOA) plays with these types of properties.
When you purchase either a condo or townhouse, you’ll have to abide by HOA rules, but also cash out for HOA fees. HOA’s fees are typically higher in condos, as the HOA is responsible for most of the maintenance, which allows for a lock-and-leave mentality, where you don’t have to worry about repairs.
This is another difference between a townhouse and a condo, as HOA fees for townhouses cover only a few services, such as water bills or lawn maintenance. Any repairs on a townhouse may be a bit expensive, and you might have to pay for them at a moment’s notice.
Now, let’s quickly go over the remaining property types: Single-family and semi-detached homes.
Single-Family Homes
Single-family homes or fully detached, stand-alone properties are the dream of many wannabe homeowners, but these can be very expensive. Still, they come with much more space, privacy, and rights than the other options on this list.
Semi-Detached Homes
A semi-detached house shares some similarities with the townhome definition, except you get to share a single outer wall of your home with someone else, whereas with a townhouse, you usually share both. These houses are typically mirrored images of each other.
So, Which Home Is Right for You?
As usual, the answer is: It depends on you and, more specifically, your lifestyle.
People who chose condos typically appreciate living with neighbors, sharing common areas, and take a lot of comfort from it. Not having to worry about maintenance in a condo is a nice bonus, even though it might mean paying a bit more in HOA fees each month.
On the other side of the condo vs. townhouse debate are the people who appreciate their privacy more. They could also prefer the type of lifestyle that requires a backyard, for example, but cannot yet afford a single-family home.
By Vladana Donevski ·
February 24,2022
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