HDF Blog

First-Time Homebuyers: What Kinds of Mortgages Are There?

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

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

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.

Federal Housing Administration (FHA) Loan
  • FHA loan allows buyers who may not qualify for a conventional home loan to obtain one with as low as 3.5% down payments, low closing costs, and easier credit qualification. The size of your loan may be limited, however, and buyers are also required to pay mortgage insurance around 1% of the cost of the loan.
Veterans Administration (VA) Loan
  • VA loan is a home loan for eligible veterans, active duty personnel, and surviving spouses. These loans offer competitive rates and low or no down payments and no mortgage insurance requirement. However, the size of home may be limited and there is strict requirement on the type of home you can purchase.
U.S. Department of Agriculture (USDA) Loan
  • USDA loan is an option for families in rural areas with low savings but want to purchase a home. These loans generally don’t not require down payment and offer low mortgage interest rate. Borrowers need to meet certain debt to income ratio and are required to pay mortgage insurance, however.
Downpayment Assistance Loan
  • A down payment loan is a smaller loan intended to assist the buyer in making the down payment on a property. With the down payment assistance loan, the buyer can avoid paying mortgage insurance – an extra fee that is added to your mortgage payment if you are borrowing more than 80% of the value of your home.
  • There are many different kinds of down payment assistance loan programs available from lenders and nonprofits, with varying eligibility requirements. Check with your Housing Development Fund, Inc. homeownership advisor to see if you might qualify for one of these programs!

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!