What is a mortgage?
A mortgage, by definition, is a debt instrument secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgage loans can be refined in different types of ways to best suit a borrower’s personal situation and provide the most financial harmony for their circumstances.
Let’s review some of the most popular types of mortgage loans:
1. Conventional Loans
A conventional mortgage is any type of home buyer’s loan that is not secured by a government entity, rather through private lenders such as banks, credit unions, or mortgage companies. Conventional mortgages typically have a fixed rate of interest, or an unchanging interest rate through the life of a loan. This is the most common type of mortgage loan, representing over 75% of all home loans in America.
Conventional loans require extensive documentation from the borrower to ensure they are a qualifying candidate such as proof of income (past and current), asset analysis, verification of employment, and credit score. When applying for a conventional loan, understand that you will be thoroughly assessed through underwriting on the following before becoming conditionally approved:
2. FHA Loans
An FHA, or Federal Housing Administration, mortgage is a federally-backed loan from FHA-approved lending institutions or banks designed for low to moderate income borrowers who have lower than average credit scores and can not afford a significant down payment on a home. FHA mortgages require the borrower to purchase mortgage insurance and back all premiums back to the FHA. The FHA protects lenders against defaults on payments – this makes it easier for you to qualify, and allows lenders to offer lower interest rates.
3. VA Loans
A VA loan is a $0-down mortgage option issued by lenders and partially backed, or guaranteed, by the Department of Veterans Affairs (VA). Eligible borrowers can use a VA loan to purchase a property as their primary residence or refinance an existing mortgage. As long as a Veteran presents his Certificate of Eligibility and has a 41% DTI or better, they will be approved for this loan with no monthly insurance premiums.
4. USDA Loans
A USDA home loan is a zero down payment mortgage for eligible rural and suburban homebuyers. USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture. As the department states, the loan program is designed to “improve the quality and life of life in rural America” by offering very small rates of interest and no down payments.
Make sure you research USDA properties in the home buying process, because there is a lot more than you would think!
5. Non-QM Loans
A non-QM loan is any loan product that doesn’t meet the standards of a qualified mortgage. In most cases, non-qm applicants have standards that do not qualify for conventional loans such as erratic income or non-traditional employment status. According to data, the most common reasons that borrowers seek out a Non-QM loan are:
- Limited documentation
- DTI exceeds 43%
- High equity, low income
- Interest-only loans
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