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A fixed rate mortgage is the most common and popular loan type when purchasing a home. Fixed rate mortgages are defined by one single feature that all of these home loans share. They have a set interest rate that doesn’t change for the duration of the mortgage. The rate is set at the time of underwriting and might be lowered through purchasing points at closing, but once all of the papers are signed, the interest rate doesn’t change for the entire time the mortgage is in effect.
This is in contrast to adjustable rate mortgages, which have rates that change for the duration of the mortgage. Many adjustable rate mortgages start out with a set interest rate for a specific number of years (e.g., three or five years), but their interest rate can fluctuate after this period of time. The rate is adjusted based on the current going rate for identical loans.
Because fixed rate mortgages don’t have changing interest rates, homebuyers know exactly what they’ll pay when signing up for these loans.
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FHA mortgages are insured through the Federal Housing Administration. These home loans are generally used by low- and moderate-income homebuyers who would have trouble qualifying for a conventional mortgage.
Sometimes FHA mortgages are referred to as HUD home loans because the Federal Housing Administration is a division of the U.S. Department of Housing and Urban Development. (Additionally, the FHA is sometimes mistakenly referred to as the “Federal Housing Authority” but the agency’s name is technically the “Federal Housing Administration.”)
The primary advantage of an FHA mortgage is that it comes with lower minimum requirements than conventional mortgages do. Because the FHA insures these mortgages, lenders are willing to require smaller down payments and provide the home loans to borrowers with lower credit scores.
Homebuyers end up paying for the insurance that the FHA provides, but for homebuyers with limited incomes and/or imperfect credit histories, this may be the most realistic way to obtain a mortgage.
If you’d like to purchase a house but are struggling to qualify for a conventional mortgage, an FHA mortgage might provide an easier and faster path to homeownership. Specific loan requirements can vary, but they’re generally much easier to meet than those of a conventional mortgage.
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FHA streamline mortgages are a refinancing option that’s available to qualifying homeowners who already have a mortgage that is insured by the Federal Housing Administration. For homeowners who can save money by refinancing and meet the program’s criteria, the option offers an expedited way to refinance into a new FHA-insured home loan.
The main benefit of an FHA streamline refinance is that it requires less documentation than most other mortgage and refinance options. No income verification or appraisal is required, which results in less hassle, saves time and lowers the closing costs.
In order to qualify for this type of refinance, homeowners must be current on their existing FHA home loan and the new mortgage has to provide a tangible financial benefit. There are a few additional criteria (e.g. the existing FHA home loan must be in place for at least six months) as well.
If you have an FHA mortgage that’s current and can save money by refinancing, an FHA streamline refinance is likely the easiest and most inexpensive way to get a new home loan.
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VA mortgages are offered by Veterans Affairs as a thank-you and reward for service in the armed forces. These home loans are available to service members, veterans and qualified surviving spouses, and the requirements are usually easier to meet than those of a conventional mortgage.
Although most VA mortgages are underwritten by private lenders, lenders are willing to reduce their requirements for these mortgages because the loaned amount is guaranteed by Veterans Affairs. Should a mortgaged house go into foreclosure, Veterans Affairs will cover a portion of the lender’s losses. (The VA directly underwrites a small number of mortgages through specialized programs.)
There are a couple of ways that lenders ease the requirements for VA mortgages. These mortgages usually have more lenient credit and income requirements, and they don’t require a downpayment.
If you’ve personally served in the armed forces or are the surviving spouse of someone who did, a VA mortgage may make homeownership attainable even when other mortgage programs don’t. Even if you don’t have a downpayment saved up or a perfect credit score, you might still qualify for a VA mortgage.
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The VA Interest Rate Reduction Refinance Loan program is a refinancing option that’s available to qualified homeowners who have an existing mortgage that’s backed by the Department of Veterans Affairs. For veterans and other qualified homeowners, IRRRL mortgages offer an expedited way to refinance a home loan.
(IRRRL is pronounced “earl,” and these mortgages may also be called “VA IRRRL refinances” or “VA streamline refinances.”)
The primary benefit of an IRRRL mortgage is the streamlined application process. There’s no income or asset qualification needed, and no appraisal required. There is still a requirement to verify that you paid your mortgage on time, but all other debts are ignored. This effectively makes the program faster and more affordable than traditional refinancing.
In order to qualify for an IRRRL refinance, homeowners must have an existing VA loan and be applying for another one. They also must realize a financial benefit from the refinance.
If you have an existing VA home loan and can save money by refinancing, this is likely the easiest, fastest and most affordable way to refinance and get a new VA loan.
Click here for more information about VA IRRRL.
Jumbo mortgages are non-conforming home loans that don’t adhere to the requirements set forth by Fannie Mae and Freddie Mac. These mortgages are generally for high-value homes, including both luxury homes and those in expensive real estate markets.
Fannie Mae and Freddie Mac are federal organizations that securitize conforming home mortgages, and the limits of these mortgages are set by the Federal Housing Finance Agency. The limit in 2018 for most counties was $484,350, but some counties with expensive real estate markets saw limits up to $726,525.
A jumbo mortgage is any mortgage that exceeds the Federal Housing Finance Agency’s limit for a county and, as a result, can’t be grouped with other mortgages through Fannie Mae and Freddie Mac. This exposes the lender underwriting a jumbo mortgage to greater risk, and they adjust the requirements and terms of the mortgage accordingly.
While individual lenders set their own requirements, the requirements are normally stricter than those of a conventional mortgage. For example, lenders might require higher credit scores, certain cash reserves, more extensive income documentation or other criteria.
Within the umbrella of jumbo mortgages, there are many variances. The options available include fixed rate and adjustable rate loans, as well as loans with many different time frames. Qualifying applicants can use these loans to purchase nearly any type of residential property.
When purchasing a home that’s valued higher than the limits of conforming loans, a jumbo mortgage is often the only type of home loan available.
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Adjustable rate mortgages are widely available and can be used to purchase almost any type of home, including both primary and secondary residences. Compared to other home loan options, these mortgages tend to provide a slightly lower interest rate that potentially offers substantial savings.
Adjustable rate mortgages are defined by a single feature that every one of these home loans has: They don’t have a set interest rate but instead fluctuate as the market’s rates change. Some have rates that change throughout the full duration of the loan, and others have changing interest rates for only a portion of the loan’s duration, but they all have interest rates that adjust for at least a few times.
The changing interest rate is in contrast to fixed rate mortgages, which have an interest rate that’s set at the time of underwriting and doesn’t change for the duration of the loan.
While a changing interest rate introduces some uncertainty into a home loan, adjustable rate mortgages tend to have lower interest rates than identical fixed rate mortgages that are currently being offered.
The uncertainty that comes with adjustable rate mortgages isn’t right for everyone. If you have the financial means to absorb some risk, though, an adjustable rate mortgage could provide significant savings thanks to its lower interest rate. Even a small decrease in the interest rate on a mortgage can result in major savings over the course of the mortgage.
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USDA mortgages refer to a variety of loans that are underwritten and/or guaranteed by the United States Department of Agriculture. These loans are available to low- and moderate-income homeowners who purchase or already own properties in qualified suburban and rural areas.
The USDA actually runs three distinct loan programs, all of which have their own specific requirements:
- Section 502 Direct Loans are mortgages underwritten directly by the USDA
- USDA Guaranteed Loans are mortgages that approved lenders underwrite and the USDA guarantees
- Section 504 Loans are loans for up to $20,000 that qualified current homeowners can use to make repairs
The Section 504 program also provides grants of up to $7,500 to elderly homeowners who qualify. Unlike loans, these grants don’t have to be repaid.
The primary advantage of a USDA mortgage is that these mortgage options eliminate the need for a down payment. The 502 Direct Loan program requires 0 percent down, and the Guaranteed Loan Program usually makes it possible to get a mortgage from another lender with no down payment. The 502 Direct Loan program also offers some additional assistance in the form of low interest rates, extended payment plans and repayment help.
The USDA’s mortgage options aren’t available to everyone, and you must purchase a home in a qualifying area to get approved. If you meet the income requirements and are willing to buy in a qualifying area, though, these options make getting into a home accessible since they eliminate the hurdle of a down payment.
Click here for more information about USDA mortgages.