Aug 3, 2017
When you’re thinking about buying a home, one of the first questions you might have is what kind of a mortgage to get – or even what types of mortgages there are! At HDF it’s our mission to make homeownership simple and demystify the homebuying process. Read on for the details you need to know about the types of mortgages!
So what is a mortgage? A mortgage is a loan that you obtain from a bank to purchase your home. Mortgages are necessary to most first-time homebuyers unless you have a large amount of money saved up already! Generally, you put down some money, the downpayment, to the bank so as to qualify for a loan. You purchase a house and repay the money plus the interest rate for a certain period of time to the bank.
Hmmm…but what kinds of mortgage are there? The two overarching types of mortgage are conventional mortgages and non-conventional mortgages. Let’s see what they are and which one is better for you!
Conventional Mortgages are the most common type of mortgage. They are offered by a private bank or other financial institution and are not insured by the government – that is the government would not pay the bank to cover the loss in case you default on the loan.
Since the banks bear higher risk from issuing these types of loans, qualifications for these loans are more strict, such as requiring a higher down payment (usually at least 20%) or a lower debt to income ratio. If you can’t afford the 20% down payment, you are likely required to pay mortgage insurance fee.
But Conventional Mortgages are not the only path towards your homeownership!
Many government agencies and nonprofits offer other types of loans that help qualified borrowers to purchase a home as well. These types of loans are Non-Conventional Loans.
Non-conventional mortgages are insured by government agencies and typically offer easier qualifying guidelines than convention mortgages, such as lower down payment requirements or higher debt to income ratios (good news!). Examples of non-conventional loans are FHA Loan, VA Loan, USDA loan, and Downpayment Assistance loan.
Buying your first home can be a lot of work. But remember, you are not alone! Many reliable banks and nonprofits provide homebuyer counseling and guidance to first-time homebuyers. At HDF, we offer homebuyer education classes regularly free of charge. So don’t forget to sign up for our next homebuyer education class or contact our counselors for help!