Types of Mortgage Loans for First-time Homebuyers

Last Updated on: 29th January 2023, 09:26 am

For a lot of first time homebuyers taking on first time home loans, finding the perfect one that meets your needs can be a bit difficult.

In this post we’re going to talk about what a mortgage loan is, how to go through the process, what are the qualifications, how to get qualified, which type of loan might be the right option for you, which one is good, which one is bad, what do you need to do to be able to apply to them and what you need to look for so you don’t end up being taken advantage of.

We have nothing against the banks and other lenders, but sometimes, they really can be a pain in the ass.

But to begin, let’s start with the very obvious question…

What is a mortgage loan?

A mortgage loan is a type of loan that allows people to purchase a home by borrowing money from a lender or bank. The borrower then pays back the loan over a specified period of time, typically 15 or 30 years, through regular monthly payments until the property becomes theirs. However, if the borrower is unable to make their payments, the lender has the right to take possession of the property.

That’s just it really, but to continue on…

What are the types of mortgage loans?

Mortgage loans are split into two types, one is unconventional and the other is a conventional loan.

Let’s start with the first one…

A.) Unconventional Mortgage Loans?

Unconventional mortgage loans are loans that are backed by the government, which means that they can give you the ability to get an extremely low downpayment and typically have more flexible credit and income requirements than conventional loans. However, it may have higher interest rates or fees.

3 main types of unconventional mortgage loans for first time homebuyers:

FHA Loan
VA Loan
USDA Loan

1. FHA loan

FHA loan is a highly popular option among borrowers, particularly first-time homebuyers. One of the benefits of this loan is the low down payment requirement of just 3.5% if you plan to live in the property. Additionally, the loan term can be as long as 30 years, providing more flexibility in terms of repayment. However, one potential downside to an FHA loan is that the interest rate may be slightly higher than on a conventional loan, meaning the less that you put down, the more interest you’re going to pay over however long your loan is. Additionally, this type of loan requires mortgage insurance premiums (MIP) which can add to the cost of the loan.

Is FHA loan the best mortgage loan option for first time homebuyers?

An FHA loan is a great option for first-time homebuyers who may not have a lot of money for a down payment, that’s why it’s the number one option to go for. However, FHA isn’t anything that will make your loans any less than how much they actually are, it will just spread it out over the longs years, and because your downpayment is low, they’ll try to get it out of you through added interest and MIP payment. But overall, FHA loan is a great option as long as you (as a borrower) don’t overspend your money and put yourself in a situation where you can’t afford to make mortgage payments anymore.

What happens if you can’t pay your FHA mortgage loan anymore?

If you’re having trouble making your FHA mortgage payments, you will be at risk of losing your home through foreclosure. This is a legal process where the lender takes ownership of your property and sells it to recoup the outstanding mortgage debt. But before your lender begins this process, they are obligated to provide you with a notice of default. This is your chance to catch up on missed payments or work out a solution with your lender to avoid foreclosure.

What is A mortgage insurance premium (MIP)?

It’s insurance that you pay to the bank every single month on top of your mortgage payments.

What’s a Mortgage Insurance Premiums (MIP) used for?

MIP, or Mortgage Insurance Premium, is a fee collected by banks and other lenders from borrowers who take out an FHA loan and is used to recoup some of the losses that will incur in an event that a borrower failed to make the required payments. This is because, with an FHA loan, borrowers typically make a smaller down payment compared to a conventional loan, which makes the lender take on more risk since the borrower has less invested in the property.

2. VA Loan

VA loan is for people who have served in the military and is probably the best loan package ever, and for good reasons: it offers a no down payment requirement, no mortgage insurance and competitive interest rates. However, there will be some small fees associated with it.

Why is VA loan the best mortgage loan?

VA loan gives you the ability to put zero money down, yes you heard it, no money down. However, there will be small fees to get this loan. VA loan fees include:

Upfront funding fee: This fee is a one-time charge that is paid to the Department of Veterans Affairs (VA) for the guarantee of the loan. The fee is a percentage of the loan amount and can vary depending on the type of loan, the down payment, and whether the borrower is a first-time or subsequent user. The fee can be financed into the loan or paid in cash at closing.
Appraisal fee: This fee is charged to cover the cost of the property appraisal, which is required to determine the value of the property being purchased. The fee is typically paid by the borrower at the time of the appraisal.
Closing costs: These are the costs associated with the loan closing. These costs include things like title insurance, recording fees, and attorney’s fees. Closing costs can vary depending on the lender and the location of the property. The VA limits the amount of closing costs that a lender can charge to the borrower, but some costs may still be passed on to the borrower.

Should you have a property selected before or after obtaining a VA loan?

You can choose to either have a property picked out before going to the bank for a VA loan, or you can go to the bank first to get pre-approved for a loan and then start looking for a property.

Going to a bank first to get pre-approved for a VA loan will give you an idea of how much you can afford, and what your monthly payments will be. This will also give you a better idea of how much you will need to save for closing costs and other expenses.

However, it’s still best to have a property picked out before getting a VA loan. This way, the process of getting the loan will be smoother and quicker. It will also help you know how much money you need to borrow and make the process of applying for the loan easier. The lender will also be able to check if the property you want to buy meets the VA loan requirements.

3. USDA Loan (RHS)

USDA loan, also known as a Rural Housing Service loan (RHS), is a government-backed mortgage program that helps low- and moderate-income people in rural areas buy a home. This loan is guaranteed by the United States Department of Agriculture (USDA) and it allows borrowers to purchase a home with no down payment, making it more affordable for people who may not have a lot of money for a down payment.

What’s the downside of USDA loan?

USDA loans can take longer to get approved, the property you want to buy must be located in a rural area, to be eligible borrowers must have a certain level of income and not all lenders offer them. Plus, you have to pay a one-time fee which is a percentage of the total loan amount, typically around 1% to help cover the cost for the government. Another downside is that the mortgage insurance might be higher than other loans.

B.) Conventional Mortgage Loans?

Conventional mortgage loans are loans that you get through a bank and are backed by the bank. Meaning if the borrower fails to pay off the loan, the bank is responsible for the loss, not the government. That said, conventional loans generally have stricter credit and income requirements. This type of loan can also offer better downpayment rates that could go as low as 5%. But keep in mind that conventional loans require you to pay PMI or Private Mortgage Insurance.

Read here – Mortage Loans: MIP and PMI Explained

Unconventional loans are also subcategorized into two types: non-conforming and conforming loans.

What are non-confirming and conforming loans and their differences?

Non-conforming loans, also known as jumbo loans, are loans intended for purchase of higher-priced properties or luxury homes. Conforming loans usually offers better interest rate and an option to put a lower downpayment on. Conforming loans on the other hand are loans intended for purchase of a normal type of home, meaning there will have limits on the amount of the loan you can obtain.

7 types of conventional mortgage loans

ARM Loans: Adjustable Rate Mortgages, also known as ARM loans, have an interest rate that can change over time based on market conditions. The interest rate is usually fixed for a certain period of time, after which it can increase or decrease. These loans can be a good option for borrowers who plan to sell their home before the interest rate adjusts, or for those who can afford a higher payment if the interest rate goes up.
HomeReady: This is a conventional loan program offered by Fannie Mae that is designed for low to moderate-income borrowers. It allows for a down payment as low as 3%, and has relaxed credit and income requirements compared to traditional conventional loans. HomeReady loans also have flexible options for non-traditional borrowers, such as those who are self-employed or have rental income.
Non-qualified mortgages: also known as Non-QM loans, are given to borrowers who can’t meet the requirements for a traditional loan. These loans can have high interest rates and are intended for borrowers with less than perfect credit, self-employed borrowers, or those in non-traditional financial circumstances.
Portfolio loans: These are conventional loans that are held by the lender and not sold to investors. This can give the lender more flexibility in terms of credit and income requirements, and can be a good option for borrowers who don’t qualify for traditional financing.
Fixed-rate mortgages: These loans have a stable interest rate that remains the same for the entire loan term. This provides clear expectations for the borrower, eliminates surprises, and ensures that the monthly principal and interest payments never change.
Interest-only mortgages: These loans allow the borrower to pay only the interest on the loan for a certain period of time, with the principal due at the end of the loan term. These loans can provide a lower monthly payment in the short-term, but can be more expensive in the long run, as the borrower will eventually need to pay off the entire loan balance.
Conventional 97: This is another conventional loan program offered by Fannie Mae that allows for a down payment as low as 3%. It is similar to the HomeReady loan program in terms of relaxed credit and income requirements, but is intended for borrowers who are looking to purchase a primary residence.

Is lower mortgage loan downpayment better than a higher mortgage loan downpayment?

Anytime you’re doing a lower downpayment on a mortgage loan, you’re going to have a higher interest rate. However, anytime you do a bigger downpayment, you’re gonna have a lower interest rate.

Is shorter mortgage loan term better than a longer mortgage loan term?

Anytime you have a shorter loan term, you’re interest rate is going to go down, but higher monthly mortgage payment. However anytime you have a longer loan term, you’re interest rate is going to go up but lower monthly mortgage payments.

Mortgage loan approval: going through the process, requirements and the qualifications

The process of how someone gets approved for a mortgage loan, the requirements needed and the qualifications will be written in a separate post.

Read Here: First-Time Homebuyer’s Guide to Mortgage Approval

Hope this post helps.
Thanks for reading!
N.G.