For a lot of first-time homebuyers taking on their first home loan, finding the perfect one that meets your needs can be difficult. In this post, we’re going to talk about what a mortgage loan is, how to go through the process, what the qualifications are, which type might be right for you, and what to look for so you don’t end up being taken advantage of.
What Is a Mortgage Loan?
A mortgage loan allows people to purchase a home by borrowing money from a lender or bank. The borrower pays back the loan over a specified period — typically 15 or 30 years — through regular monthly payments. If the borrower is unable to make payments, the lender has the right to take possession of the property.
Mortgage Loan Types
Mortgage loans are split into two categories: unconventional and conventional.
A. Unconventional Mortgage Loans
These are loans backed by the government, offering extremely low down payments and more flexible credit requirements. However, they may have higher interest rates or fees.
1. FHA Loan
A highly popular option for first-time homebuyers. The down payment requirement is just 3.5% if you plan to live in the property, and the loan term can be as long as 30 years. The downside is that interest rates may be slightly higher, and the loan requires mortgage insurance premiums (MIP), which add to the cost.
If you can’t pay your FHA mortgage, you’ll be at risk of foreclosure — a legal process where the lender takes ownership of your property. Before this begins, the lender must provide you with a notice of default, which is your chance to catch up on missed payments.
2. VA Loan
For people who have served in the military — probably the best loan package available. It offers zero down payment, no mortgage insurance, and competitive interest rates. The only fees are a one-time upfront funding fee, appraisal fee, and closing costs.
3. USDA Loan (RHS)
A government-backed program for low- and moderate-income people in rural areas. It allows zero down payment, but the property must be in a rural area, and the approval process can take longer.
B. Conventional Mortgage Loans
These loans are backed by banks. They have stricter credit and income requirements but can offer down payments as low as 5%. They require PMI (Private Mortgage Insurance) if your down payment is less than 20%.
7 Types of Conventional Loans:
- ARM Loans: Adjustable rate that can change over time based on market conditions.
- HomeReady: Fannie Mae program for low-to-moderate income borrowers, 3% down payment.
- Non-qualified mortgages: For borrowers who can’t meet traditional requirements — may have higher rates.
- Portfolio loans: Held by the lender, offering more flexibility in requirements.
- Fixed-rate mortgages: Stable interest rate for the entire loan term.
- Interest-only mortgages: Pay only interest for a period, with principal due later.
- Conventional 97: Another Fannie Mae program with 3% down for primary residences.
Key Things to Remember
- Lower down payment = higher interest rate
- Shorter loan term = lower interest rate but higher monthly payments
- Longer loan term = higher interest rate but lower monthly payments
Once you understand your mortgage options, you’ll be better prepared to find and buy your first rental property. And if you decide to use your property for the BRRRR method, understanding these loan types will help you plan your cash-out refinance exit strategy.
