Loan Basics

Before describing the different types of mortgages available to home buyers, it is important that home buyers understand exactly what is a mortgage. When an individual decides to purchase a home, they often have a set amount of money to contribute towards the purchase of the home. The difference between the amount of money the individual has to put toward the purchase and the actual purchase price of the house, including closing costs and other miscellaneous fees, will constitute the mortgage. Home buyers usually take out a loan to cover this difference. The type of loan an individual applies for to cover the home’s mortgage will depend on several factors. These factors will help home buyers determine the type of loan that will be right for them.

Types of Home Loans

Everyone’s financial circumstances are unique as are their plans for the home they purchase. Some home buyers intend to live in the home for years to come while others only intend to keep the home for a short period of time. These factors will help home buyers select the mortgage loan that will be best suited for their needs, and these types of loans include: fixed rate, adjustable rate (ARM), interest only, jumbo, FHA, VA, balloon, and option ARMs or negative amortization loans.

Conventional Home Loans

Conventional home loans are those that are not guaranteed or insured by the federal government. Conventional loans include loans such as fixed rate, adjustable rate, interest only, jumbo, balloon, and option ARMs. Conventional loans may either be considered conforming or non-conforming loans. Conforming loans are those loans whose limit fall within the borrowing guidelines established by Freddie Mac and Fannie Mae. Non-conforming loans are those loans whose loan limits are outside of or exceed these borrowing guidelines. Conforming loans include loans such as fixed rate and adjustable rate mortgages. Non-conforming loans include jumbo loans and any loans written for more than $417,000. Hybrid or combination loans, such as option ARMs, are considered conventional loans.

Government Home Loan Programs

There are two government home loan programs that will be of particular interest to some home buyers. FHA loans and VA loans are two types of government loans that can be utilized by home buyers. FHA loans are offered by the Federal Housing Administration, which administers various programs for mortgage loans. In most cases, FHA loans require a much lower down payment than conventional loans, and home buyers may find it easier to qualify for these loans. VA loans are government loans that are guaranteed by the U.S. Dept of Veterans Affairs. These loans are available to veterans and other service persons. With a VA loan, veterans can obtain a home loan with little or no down payment necessary.