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A Mortgage Lender's Guide to the Types of Home Loans

March 24, 2022 | By Reef Merhi
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The search for a new home can be exciting for first-time homebuyers. However, buyers must understand important considerations such as financing before taking the final step toward the purchase.

There are several different types of mortgages available to homebuyers, including some specifically designed to help first-time purchasers who may need assistance. Understanding these mortgage options, such as FHA loans and the USDA loan Texas homeowners may utilize, can help you pursue the purchase of your dream home and choose among the best mortgage lenders in Texas! Here’s a quick guide to different types of home loans.

Conventional Loans Are Common

A conventional mortgage is a loan available to buyers with strong credit and a sizable down payment. The conventional mortgage, which the federal government does not insure, has a fixed interest rate of over 30 years and is the most popular loan for homebuyers. It typically requires the borrower to put down a minimum of 20% of the purchase price to avoid paying private mortgage insurance (PMI).

HOME LOAN sign against house

There are two types of conventional loans: 

  • A conforming conventional loan meets federal housing finance standards, which relate to things like your credit, debt payments, and loan size. 
  • A nonconforming conventional loan does not meet the federal standards because it may be for a large amount or offered to buyers with subpar credit or who have gone through bankruptcy. 

In addition to understanding the two types of conventional mortgages, keep in mind that there are conventional loan limits Texas homeowners need to pay attention to.

A conventional mortgage is more flexible than others because it can be used to purchase a vacation home or investment property. The mortgage rules also allow some buyers to pay as little as 3% as a down payment. When considering this home loan, you’ll need a minimum credit score of 620.

FHA Loans Help With Lower Credit Scores

Loans backed by the Federal Housing Administration (FHA) help borrowers who don't have enough for a sizeable down payment or have less-than-perfect credit. An FHA mortgage is often the best choice for borrowers who cannot qualify for a conventional loan. FHA loans require borrowers to have a minimum credit score of 580 to qualify for 96.5% financing with 3.5% down. However, in some cases, borrowers with a minimum credit score of 500 can also qualify for financing with 10% as a downpayment. 

FHA loans include higher upfront and monthly fees, including a monthly mortgage insurance premium if you put less than 10% down. The FHA loan's credit requirements are not as strict as a conventional loan, but the monthly PMI charges can only be removed when the loan is refinanced. To find out if this type of loan can work for you, talk with one of the best mortgage lenders in Texas!

VA Loans Support Active Military and Veterans

Members of the U.S. military, veterans, and their spouses qualify for flexible, low-interest loans backed by the Veterans Administration. The VA loan does not require a down payment or PMI. 

A VA home mortgage will also not require a down payment or mortgage insurance, and closing costs are generally capped and may be paid by the seller. However, these loans often include a funding fee, which is a percentage of the loan amount to pay for the home loan program. The rules allow this fee and closing costs to roll into most VA loans to help reduce upfront costs for the purchase. In some cases, a mortgage lender may allow more flexibility with credit scores for VA loans.

Fixed-Rate Mortgages Stay Consistent

A fixed-rate mortgage charges the same interest rate over the life of the loan. The mortgage typically comes in terms of 15, 20, and 30 years. This loan type is ideal for people who plan to remain in their home for an extended period and seek a consistent monthly payment over the life of the loan. 

Approved mortgage loan agreement application with house shaped keyring

In addition, fixed-rate loans allow easier budgeting for monthly mortgage payments, although the interest rates are typically higher than the rates on adjustable mortgages.

Adjustable-Rate Mortgage Fluctuate Over Time

Unlike the stable interest rate paid on a fixed-rate loan, an adjustable-rate mortgage (ARM) features an interest rate that can vary over the life of the loan as the market fluctuates. As interest rates increase broadly, the interest on an adjustable-rate loan can increase. 

These loans are best suited to borrowers who don't plan to stay in their homes for long and want lower monthly payments to start. For example, a seven-year ARM can have stable rates for the first seven years, then adjust up or down after that. Some ARMs adjust annually, while others can change every six months. 

The Best Mortgage Companies Texas Offers Can Help You Find the Best Loan

As a first-time buyer, it’s essential to pick the home mortgage that works best for your financial situation. However, we understand that understanding different loan options can be confusing and frustrating when buying a house for the first time—and we’re here to help! Reach out to Texas United Mortgage to review all of your loan options and find the financing that’s right for you.

Learn more about the homebuying process! Download our free “First-Time Home Buyer’s Guide.”

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