Real Estate Loan Types: 6 Different Loans You Need to Know

NjumAre you in the market for a new home? Then you’ll be looking for a home loan, and the problem is there are just so many different ones. You need to know what are the real estate loan types so you know what to expect.

Take a look online, and you’ll find a huge array of real estate loan types available. The problem is, they’re all designed for different people with different needs, so which one should you go with?

If you’re confused, don’t worry, you’re in the right place. This guide has all the most important types of home loans, as well as the info on why you should consider them.

Read on to see what’s out there and what may be right for you.

6 real estate loan types and their differences

1. Fixed-Rate Loan

This is one of the most common real estate loan types out there. So when you start shopping around for loans, this is usually what you’ll find.

When you take out a fixed-rate home loan, you’ll pay the same interest rate throughout the whole loan. Of course, the principal and interest paid will change each month, but nothing else should.

For example, during the first month of your mortgage, you’ll pay $599.55 in home loan repayments. The principal will be $599.55, the interest will be $500, and the principal balance will be $99900.45.

The next month, the payment again will be $599.55. The principal will be $100.05, the interest will be $499.50, and the principal balance will be $99800.40.

The first payments you make, usually over the first few years of the mortgage, will go towards your interest payments.

Fixed-rate loans: the verdict

Many prefer to go with these loans because the amounts stay the same every month. This makes it very easy to budget, and you’ll see that you’re protected from sudden changes in payment rates if interest rates rise.

They’re a loan type that’s easy to understand, which will be perfect for first-time buyers. Your lender will walk you through the different types of fixed-rate terms available.

Typically, you can get 30, 20, and 15-year terms. While the 30-year loan looks good on paper, as you’ll spend less every month, you will be paying more overall in terms of interest.

2. Adjustable-Rate Loan

One of the most common real estate loan types out there is the adjustable-rate loan. Rather than having a fixed amount of interest you pay every month, you pay a variable rate.

When you first take out the loan, you’ll have an interest rate set below the market value. Then, as time goes on, the rate will rise.

When you take out an adjustable-rate mortgage, or ARM, you’ll be walked through exactly what will happen. You’ll know exactly how long the initial fixed-rate will be before the rate starts going up.

That period can be anywhere from one month to 10 years, so it pays to shop around and see what’s out there for you.

As a borrower, you may be initially attracted to ARMs as they’re a lot cheaper than fixed-rate mortgages. However, if you’re looking for something more cost-effective, this may be it.

However, you do need to be aware that these loans can be more expensive over time. If you hold the loan for long enough, you can find yourself paying more in interest than you would on a fixed-rate loan.

These loans are more complicated than a fixed-rate loan, too. You’ll need to become familiar with many different terms, so you’ll need to talk to a lender to understand the ins and outs.

Adjustable-rate loans: the verdict

Some find that an ARM is right for them, as they can take advantage of falling interest rates and get a bigger loan than they could have otherwise. It makes the loan cheaper for at least a few years, too.

The downside to these loans is that your interest rates will frequently change over the life of the loan. As the interest rates reflect the market, you may see your interest rates rise significantly.

3. Conventional Loan

A government body doesn’t insure a conventional loan. This is the most common type of loan out there, and private companies, such as banks, usually offer them.

There are two types of conventional loans: conforming and non-conforming loans. If a loan is non-conforming, that means it doesn’t fit within the maximum limits set by the Federal Housing Finance Agency.

A conforming loan will top out at $548,250. This is the current limit that has been set, although it is subject to change.

These loans are considered the best for many buyers as the overall borrowing costs tend to be lower than other loans. You can also deposit as little as 3% of the home’s value if Fannie Mae or Freddie Mac backs the loan.

Conventional loans: the verdict

There are some downsides to getting a conventional loan. Typically, the interest rates will be higher than other loans, so you’ll need to keep this in mind.

If you’re putting down less than 20% on the loan, too, you’ll be required to pay private mortgage insurance. This is designed to protect the lender should the borrower default on the loan.

While this does create extra costs for you, you can actually get the PMI canceled on a loan once you reach 20% equity. So keep that in mind when you’re shopping around for loans.

To qualify for a conventional loan, you’re going to need a high credit score to be considered for the best rates. Typically, lenders are looking for a score of 620 or higher.

However, that doesn’t mean you can’t get a loan at all. There are plenty of loans available to those with lower scores, as you’ll see later on.

You’ll also need to present a lot of documentation to secure a conventional loan. These include things like tax returns, proof of income, identity documentation, and more.

While you need to meet some high standards to qualify for a conventional loan, they’ll still be the best option for most people. If you have a good credit score, then this is where you’ll find the best deal for your home loan.

4. Jumbo Loans

If you’re looking for non-conforming real estate loan types, then you’re most likely going to go with a jumbo loan. These are loans that exceed that maximum value as set by the Federal Housing Finance Agency.

Most commonly, these loans are designed to help fund the purchase of luxury homes in the most competitive real estate markets. However, if you’re looking to take out a jumbo loan, you’ll need to meet some unique requirements to qualify for one.

The people most likely to qualify for a jumbo loan are known by the acronym HENRY: High Earners, Not Rich Yet. They typically earn between $250,000 and $500,000 a year.

These people won’t have the cash on hand to buy a luxury home outright, but they will cover most costs on a jumbo loan.

Jumbo loans: the verdict

As you would imagine, you do need to meet some stringent requirements to qualify for a jumbo loan. Your credit score needs to be very high, as this will help show you’re able to manage your money and make the repayments.

You will also need a very low debt to income ratio. This is usually under 43%, although your lender will tell you what exactly you need to qualify.

Just as you would with regular loans, you’ll need a large down payment on your loan too. In the past, you’d be required to put down at least 30% on your loan, although this has loosened up in recent years.

Now, you can put down as little as 10%, although you may need to pay PMI on your loan if you do so. As such, it’s best to put down at least 20%.

If you can meet all these requirements, you should secure your jumbo loan for your dream home. In addition, lenders are often willing to consider them, as these borrowers may want to consider them for other financial services down the line.

5. VA Loans

There are certain loans out there that are designed with a certain set of people in mind. One of the most common ones is the VA loan or a loan backed by the United States Department of Veterans Affairs.

These loans are unique as the VA backs the loan itself while private lenders offer the money. They were created to allow active service people, veterans, and surviving spouses to become homeowners.

Remember, though, you don’t need to be a first-time buyer to qualify for this loan. Instead, you simply need to fit into one of the groups listed above.

VA loans: the verdict

There are a lot of benefits that you can take advantage of if you’re in that group. Some VA loans, for example, won’t require a down payment on them.

You’ll also see no private mortgage insurance requirement, which makes the loan a lot cheaper than other loans out there. Of course, you’ll save more as well, as there are limited closing costs.

There are actually multiple VA loans that you can consider. For example, the Native American Direct Loan Program helps eligible Native American veterans buy their homes. In contrast, adapted housing grants help veterans with service-connected disabilities convert their homes as needed.

These loans can offer better rates as the loans themselves are backed by the VA. That gives private lenders more security, and so they can offer better deals on the loan itself.

If you feel you would qualify for a VA loan, it’s a good idea to talk to a lender about your options. They may be able to offer something that works for you.

6. FHA Loans

Do you feel as though you can’t get a home loan because you don’t meet some of the requirements listed here? Then you may actually be eligible for an FHA loan.

These are government-insured mortgages, just as a VA loan is. They’re designed for those who don’t usually meet the requirements of most lenders to help them become homeowners.

Typically, an FDA loan is for you if you don’t have the best credit score or a large down payment saved up. This allows you to still get on the housing ladder and start building up equity without spending a long time improving these things.

Again like the VA loans, these loans are backed by the US government. As such, that offers more security to lenders so they can lend to these borrowers securely.

Your credit score needs to be a minimum of 580 to get the maximum 96.5% financing through an FHA loan. However, you can get one with a 500 credit score if you’re able to put at least 10% down.

That 10% can come from gifts, savings, or a grant for down payment assistance. Because of these benefits, an FHA loan is usually a great option for first-time buyers.

There are several kinds of loans you can get under this umbrella. This includes the home equity conversion mortgage, which allows homeowners over 62 to exchange home equity for cash.

There’s also the 203(k) mortgage program, which gives you extra funds to pay for energy-efficient home improvements. It’s always a good idea to talk to a lender or broker about what’s available to you.

FHA loans: the verdict

Be aware that you’ll be paying two kinds of mortgage premiums if you take out an FHA loan. First, there’s the upfront mortgage insurance premium, or MIP, and the annual MIP.

You can choose to pay the upfront MIP at the time of closing, or you can have it rolled into the loan itself. The insurance will be used to pay out the lender should you default on the loan.

This has been just a small selection of the real estate loan types available to you as a potential borrower. Do your research, and find the loan that works best for you.

Find the best loan, and you can start making your dreams of being a homeowner a reality.

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