Home Loans: What Are the Different Types?
A home loan refers to the loan that is used by an individual to purchase a house. The majority of the homeowners take out loans for a new home. This helps them purchase a property without having to worry about not having enough savings. Since the home loans are really large amounts of money, it makes the role of a credit score vital to the process.
There are five types of home loans:
- Fixed Rate vs. Adjustable Rate Mortgage
- Government Home Loan
- Conforming Home Loans
- Non-conforming Home Loans
- Home Refinance Loans
Fixed Rate vs. Adjustable Rate Mortgage
A mortgage loan is the most common type of home loan. A large number of people end up placing 5% down payment and continue paying 95% of the remaining mortgage for the next couple of years. There are two types of home loans, fixed rate mortgage and adjustable rate mortgage.
- Fixed Rate Mortgage A fixed rate mortgage is also known as the vanilla wafer; mortgage loan. The entire amortized mortgage loan has a fixed interest rate for the entire term of the mortgage. The borrower is provided with a fixed amount and schedule of payments.
- Adjustable Rate Mortgage An adjustable rate mortgage is also known as variable-rate mortgage or tracker mortgage. These are the most common mortgages throughout the world including the United States. Both the payments and the interest rate of a mortgage can change over the term of the loan.
Government Home Loan
These loans are provided by the federal government, which encourages home ownership. Some of the government home loans are not offered directly. Instead, these loans are insured by the government in case they default. There are four types of government house loans:
- FHA Loan
Federal Housing Authority loans are the most common type of government home loans. With their low requirements, you do not have to worry about a poor credit score. \
- VA Loan
This loan is dedicated for veterans who do not have to make a down payment.
- USDA Loan
The United States Department of Agriculture offers a mortgage without any down payments.
- FHA 203k Rehab Loan
This loan can be used for not only purchasing a house but also for its repairs if any. The property must be in a livable condition. Unlike the other FHA loans, these do require a higher credit score (640).
Conforming Home Loans
A conforming loan is a mortgage loan that is equal to the dollar amount established by the Federal Housing Finance Agency (FHFA). These loans must adhere to the criteria of the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). There are two types of conforming loans:
- Conventional Loans
These are usually offered by private lenders that are not insured by the federal government. Conventional loans need mortgage insurance and an average credit score.
- Conventional 97 Mortgage
This has only one factor differing from the conventional loan, the low down payment (3%).
Non-conforming Home Loans
These loans do not meet the criteria set by a bank due to the property type or the financial status of the borrower. Non-conforming loan lenders are usually private institutions. You, as a borrower, have to search for a non-conforming home loan indifferently. Look out for exceptional rates and better customer service.
- Jumbo Loans
Since these loans offer a larger amount, it is tougher for the borrower to qualify. In addition to a higher credit score, it requires a higher loan amount.
- Super Jumbo Loans
As the name suggests, these are super jumbo loans. They offer a loan amount up to three million dollars. It means that qualifying for such a loan is extremely difficult.
Home Refinance Loans
A home refinance loan refers to the new mortgage loan that replaces the current loan. The terms and the rates of this loan can be determined by the borrower.
- Rate and Term Refinance
Normally, conventional loans are refinanced by the borrower to decrease the interest rate.
- Home Affordable Refinance Program (HARP)
This program was created by Obama to refinance loans for the properties that were a victim of a market crash. Remember, the HARP program will not be available after the end of this year.
- Home Equity Loans and HELOC
This works a lot like a credit line. You may cash out up to 80% of the market value of your home. You would only have to pay interest on the amount borrowed.
- Cash-out Refinance
The borrower can use this to refinance their mortgage by using the home equity. After cashing out, they would only have one mortgage at a relatively low-interest rate.
- Streamline Refinance
Unlike other refinancing loans, a streamline refinance does not need to check your financial information. Contrarily, there is far less paperwork.
What Comes After a Mortgage Approval?
In order to maintain a good credit score for the future, you should consider the following:
- Avoid Major Purchases
Using the credit to purchase things right after the home loan will have a negative impact on your credit score.
It should go unsaid that you should be punctual with your payments. This will not only improve your credit score but also save you from decreasing them.
- New Credit
Opening new credit cards increases risk because the lender will assume you are increasing the available credit.
- Utilization Ratio
A higher frequency of transactions, debits or credits, raises concern because the frequent transactions increase utilization ratio that has a negative impact on credit score.
An unstable job equals higher risk. In case such a scenario arises, avoid switching career while purchasing a house.
With a wide variety of home loans, you can select the one that is suitable. Before moving ahead with a home loan, you should consider mulling over this with a professional. A home loan is not an easy task, considering your credit score. For example, you have a good credit score and you take a home loan that is difficult to pay off. The inability to meet regular installment payments will not only decrease your credit score but can also put you in a dangerous place in life.
On the other hand, let us assume that you do have a poor credit score and you somehow manage to get a home loan. You should carefully consider this loan because failure to meet the payments could lead to a foreclosure. A foreclosure will just make your credit history look worse than its current state. So, be informed about all the possibilities that might take place. Consult with a professional before making any big decision. Most importantly, remember to meet the payments and use the home loan wisely.