The Organized Life

Home Mortgage Types Explained

Many homes may look the same, but the types of loans used to buy them can be very different. There’s so many kinds of home loans that first-time buyers need to ask lots of questions to have home mortgage types explained. After all, they want to choose the right type of loan to fit their finances and their lives.

“A lot of home buying has to do with people’s stage in life, whether they’re getting married, starting a family or moving to a new city,” said Gary Boyer of Mortgage Monkey. “The vast majority of people do online research, but finding the right mortgage is about connecting to the right person to help and teach them.”

If you’re looking for information about mortgages and finding out which one may fit your current financial situation, keep reading for tips from Boyer and another mortgage specialist. Together they have nearly 40 years of experience!

Conventional Financing is the Typical Choice

Conventional financing is the most common type of home loan given out by banks to people with good credit history. They typically have higher interest rates than some other loans, but they don’t come with extra insurance and fees if a borrower pays enough money for a home upfront.

“Within the real estate community, conventional loans are considered the best loans,” said Boyer. “They’re the most traditional and the most safe because the people who qualify for them have stronger credit and asset positions.”

Homebuyers who have strong credit scores and no recent financial problems – like a bankruptcy – are the most likely ones to qualify for these traditional loans, and they can use them to buy second or third homes even if they’re paying off the first one.

Since the federal government doesn’t back these loans, banks have high standards for borrowers. So it may be harder for those with less-than-great credit history to get approved with an affordable interest rate.

“You’ll be in the best position for this loan if you have a 740 or higher credit score, been employed for at least two years, and your assets will matter more,” said Boyer.

The higher your credit score, the lower your interest rate will be with a conventional loan. And people with these loans are in a better chance to get the house they want, because realtors typically see them as superior buyers, said Boyer.

Less-than-Perfect Credit? Look into FHA Loans

If your credit isn’t the best, or you’ve had some financial missteps, then conventional financing rates may become too high. In those cases, our experts recommend Federal Housing Administration (FHA) loans.

“FHA loans are directly insured by the federal government, and they have rates that are typically lower than conventional loans because of the government backing,” said Boyer.

The downside to FHA loans is homebuyers are required to carry two types of mortgage insurance for the duration of loan, unless they refinance later.

“For most people, these loans are a way to get their foot in the door,” said Boyer. “In the future, they can refinance with a conventional loan – once their credit has improved – and get out of the extra insurance.”

But it’s a great alternative for borrower’s with low credit scores, limited work history or other debts.

“FHA will be kinder to these borrowers, when it comes to interest rates and mortgage insurance rates,” said Julie Aragon, a Los Angeles mortgage specialist. “It’ll be overall cheaper.”

Some Veterans May Qualify for a VA Loan

Not every U.S. military veteran qualifies for a Veteran Affairs (VA) home loan, but it’s a great choice for those who do meet the application requirements, said Aragon.

“It’s such a great program,” she said. “You can put zero down for homes up to $679,650 in Los Angeles County, and be able to do so with a credit score as low as 560.”

The maximum home loan amount varies across the country, so make sure to consult a local expert to learn how much financing is available near you.

Qualified veterans can also borrow up to $2 million for a home, which they may need in Aragon’s Los Angeles market, and get above-average, 30-year fixed rates on loans.

These borrowers can potentially still get a low-interest VA loan if they have credit issues.

To see if you qualify, or learn more about these loans, visit the Department of Veterans Affairs website.

Home Mortgage Types Explained: Jumbo Loans

As housing prices continue to rise in major metro markets, borrowers with the financial means and credit can apply for low-interest “Jumbo” loans to finance expensive or luxury homes.

“A Jumbo loan is typically used for homes that go above what a conventional loan in your area will cover,” said Aragon.

Banks give out these private loans to borrower with near-perfect financial backgrounds, and they have the best interest rates – sometimes a quarter of a percent, said Boyer.

“In many markets – like Los Angeles and the San Francisco Bay Area – it’s the only option to qualify for a home loan, because real estate is so expensive,” he said. “But it’s hard to qualify. You need a perfect credit score – 760 or above is ideal – no credit blemishes, and typically a year’s worth of loan payments leftover in savings after paying the initial down payment.”

These are only a few home mortgage options. There are many others and finding the right one will depend on your unique financial situation. So make sure to find a reputable mortgage specialist near you to explore your best options!

“The best thing anybody can do it lookup highly-rated people in their area and talk to a professional who can guide them,” Boyer said.

*This blog is for information and illustrative purposes only. It is not, and should not be regarded as, investment advice or as a recommendation regarding any particular security or course of action. Public Storage does not purport to and does not, in any fashion, provide tax, accounting, actuarial, recordkeeping, legal, broker/dealer or any related services. You may not rely on the statements contained herein. Public Storage shall not have any liability for any damages of any kind whatsoever relating to this material. You should consult your advisors with respect to these areas.