As you begin your home-shopping journey, you might hear a lot about the 30-year conventional fixed-rate mortgage. And there’s no doubt it’s a great product for many buyers. But not all. In fact, there other mortgage options that could be better for your needs, perhaps offering a short-term solution (and super low rate) if you know you’re only going to live in an area for a couple of years.
We’ve compiled information about some common and unique mortgage types to guide you in talking with lenders about loan options. And remember, your loan could be a combination of several types discussed here — a low down payment loan with a fixed rate, for example.
When you plan to stay for the long haul
Fixed-rate loans are popular with those planning to stay put in their home for a while because they offer payment stability. These loans offer the same interest rate for the entire repayment term, normally 10, 15, 20, or 30 years. The shorter the loan term, the lower the interest rate. For example, a 15-year fixed will have a lower interest rate than a 30-year fixed. Of course, your monthly payments could fluctuate if your property tax and insurance rates change, but the interest rate itself remains the same. And should rates drop significantly, you could refinance. The fixed-rate mortgage is the workhorse of the mortgage world and is a good choice for many buyers who plan to live in their homes for a long time.
When you know you’ll be moving in a few years
An ARM is a “hybrid” loan product — meaning not entirely fixed — so named because its interest rate sets out fixed, and can then fluctuate, moving higher or lower based on the benchmark interest rate. For instance, a 5/1 ARM loan would have a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. Likewise, the 7/1 ARM would have a fixed rate for seven years, and then adjust. Although the rates can rise, they typically start off lower than those available for fixed-rate mortgages. An ARM is a good option if you know you’ll only be in an area for a few years, such as for a job relocation or during grad school.
Mortgages for first responders and teachers
HUD’s Good Neighbor Next Door program encourages homeownership among certain professionals such as police officers and teachers who they’d like to have buy a home in certain communities. The program offers a 50% discount from the list price of the home. In return buyers commit to living in the property for 36 months. Eligible single-family homes located in revitalization areas are listed exclusively for sale through the Good Neighbor Next Door Sales program. Properties are available for purchase through the program for seven days.
When you’re buying big (or in the big city)
Buyers with their eyes on an expensive home can get in the door with a jumbo loan, which is a loan that allows higher amounts that a conforming loan. Or buyers looking for homes in pricey housing markets such as New York City, Los Angeles, or the Bay Area may require one just to buy an average house. A jumbo loan will typically come with more demanding requirements than a conforming mortgage, such as a higher down payment, higher credit score, and two appraisals instead of one.
The jumbo loan threshold is $424,100 in most of the United States, although in the highest-cost areas they start at $636,150.
When you can’t save for a down payment
For buyers who have enough income to make their monthly mortgage payments but don’t have a down payment saved up, there are two 100% financing options backed by the federal government.
First, the United States Department of Agriculture (USDA) offers USDA loans, which are zero-down mortgages for rural borrowers who meet certain income requirements. The program is managed by USDA’s Rural Housing Service to target “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” Income must be no higher than 115% of the adjusted area median income, which varies by county.
Second, the U.S. Department of Veterans Affairs (VA) offers VA loans, a zero-down loan program to military service members and their families.
Because these programs are backed by the government, banks are more likely to qualify applicants with limited incomes and savings.
When you have some, but not a lot, to put down
Fannie Mae and Freddie Mac both offer 3% down loan products through participating lenders. Buyers must meet certain credit and income requirements, and generally have a FICO credit score of 620 or higher, or purchase property in certain areas. These loans may offer the option to cancel mortgage insurance once home equity reaches 20%. Homebuyer education or one-on-one counseling is required for these products.
Low-down payment loans can help borrowers buy much sooner － even years sooner － than they would have been able to if they needed to put 10%, 15%, or even 20% down.
When you’re struggling with low credit
Let’s face it, a lot of us have less-than-perfect credit scores. The good news is you still may be able to qualify for a loan backed by the Federal Housing Administration (FHA). Through private lenders, FHA offers fixed-rate and adjustable-rate mortgages with 3.5% down to borrowers with qualifying FICO credit scores over 580.
Borrowers with FICO credit scores lower than 580, but at least 500, may qualify for an FHA loan, too, but be asked to put more down. In all cases, FHA borrowers will pay for a mortgage insurance premium (MIP) as well as an upfront mortgage insurance premium (UMIP).
It’s also worth noting that USDA and VA loans have no minimum FICO credit score requirement.
When student debt is a factor
Fannie Mae and Freddie Mac allow “flexibilities” in some loan products lenders can use to help borrowers with student debt qualify for a mortgage and help those with equity refinance and use all or a portion of the proceeds to pay off their own student debt or debt they have co-signed for.
Ask a lender for information on these products if you think you won’t qualify because of your student loan debt, or want to help someone get a fresh start by paying off their debt.
When you’re buying a fixer-upper
One way to economically ease into homeownership is to purchase a “fixer upper,” a home that needs some work before you move in. There are two programs targeting those with renovation in mind, FHA’s 203(k) mortgage and Fannie Mae’s HomeStyle Renovation mortgage. FHA requires 3.5% down, while Fannie Mae requires 5%. With FHA, the homeowner hires a specialist to determine the feasibility of the renovation and oversee the project. Fannie Mae’s lenders that offer HomeStyle also oversee the project. Because these loans are riskier for lenders, you’ll pay a higher interest rate (typically one-eighth to one-quarter of a percentage rate higher than for a conventional mortgage) but you’ll also have that dream kitchen or extra bedroom.