Common Home Loans
1. Fixed-rate mortgage loan: For this loan, your clients will pay the same interest rate for the full repayment term. This means their monthly payment will never change—even for long-term financing. The interest rates on fixed-rate loans are often higher than adjustable-rate loans. But if buyers can afford it, they won’t have to worry about hikes in their rates down the road.
2. Adjustable-rate mortgage loan: With adjustable-rate mortgage loans (ARMs), the rate will fluctuate—moving both up and down—based on market interest rates. There is also a hybrid option, where the loan has a fixed rate for a specific amount of time, and then, beyond that, the rate adjusts annually. For example, the 5/1 ARM has a five-year fixed rate and then, after five years, the loan adjusts each year.
ARMs typically start off with a lower rate so they can be appealing, specifically for first-time homebuyers and other buyers on a strict budget. However, because rates rise over time, home owners could find themselves unable to pay later.
3. Conventional loan: Conventional loans are not backed by the government. They are ideal for borrowers who have good or excellent credit and good debt-to-income ratio. Such loans typically require down payments, closing costs, mortgage insurance, and points, so buyers have to bring a chunk of cash to closing.
While it is easier to qualify for a conventional loan, buyers need excellent credit to receive the best interest rates.
4. Federal Housing Administration (FHA) mortgage insurance program: FHA loans are insured by the Federal Housing Administration, a government agency within the Department of Housing and Urban Development (HUD).
Borrowers with FHA loans pay for mortgage insurance, which protects the lender should the borrower default on the loan. The insurance increases the size of the borrower’s monthly payments. The lender must be FHA-approved.
Most buyers—not just first-time buyers—are eligible for FHA loans. These loans are popular because they require smaller down payments—as little as 3.5 percent of the home price. Also, the lending standards aren’t as strict as conventional home loans. However, borrowers must have at least a 500 credit score to qualify for an FHA loan.
5. Veteran Affairs (VA) loan: VA loans are offered to military service members and their families and backed by the U.S. Department of Veterans Affairs. Should a borrower default, the VA will reimburse the lender for any losses.
To qualify for a VA loan, borrowers need suitable credit, sufficient income, and a valid Certificate of Eligibility (COE). To obtain a COE, the borrower (or his or her spouse) must not have received a dishonorable discharge and must meet specific service requirements.
A huge benefit is that borrowers can receive up to 100 percent financing, so they aren’t required to make a down payment.
6. U.S. Department of Agriculture (USDA) loan: For rural borrowers who have a steady but low income and are unable to obtain adequate housing through conventional financing, the USDA offers a loan program that is managed by the Rural Housing Service (RHS).
Borrowers’ income can’t be higher than 115 percent of the adjusted area median income of the county in which they are buying. Also, the property must be located in an eligible rural area.
Spend some time brushing up on the various home loan types and options available to your clients. That way, you’ll be able to answer their questions—or at least point them in the right direction—when they ask you about different home loan types.