Mortgage Loan Types

What Types of Mortgage Loans Are Available?

Choosing the right mortgage is an important part of the home-buying process. Different loan programs have different requirements for down payments, credit, mortgage insurance, property condition, and borrower eligibility.

The best option depends on your individual financial situation, the property you're purchasing, and your long-term goals. A qualified mortgage lender can help you compare the programs available to you.

Here are four of the most common types of financing Southwest Louisiana home buyers may encounter.

Conventional Loans

A conventional loan is a mortgage that is not insured or guaranteed by a federal government agency. Conventional loans are among the most commonly used mortgage options and can work well for buyers with established credit and stable finances.

Contrary to a common misconception, you don't always need a 20% down payment to obtain a conventional mortgage. Some conventional programs may allow qualified buyers to purchase with a much smaller down payment.

However, when a conventional borrower puts down less than 20%, Private Mortgage Insurance (PMI) is commonly required. PMI protects the lender if the borrower defaults on the loan.

One potential advantage of conventional financing is that PMI may eventually be eligible for cancellation once applicable requirements are satisfied.

Conventional loans may offer:

• Down-payment options that can be below 20% for qualified borrowers and programs
• Fixed-rate and adjustable-rate options
• Financing for primary residences and, under applicable programs, second homes and investment properties
• Potentially fewer property-condition requirements than some government-backed programs
• The ability to eventually eliminate PMI when applicable requirements are met
• Competitive terms for well-qualified borrowers

Who might consider a conventional loan?

Conventional financing can be attractive for buyers with good credit, manageable debt, stable income, and sufficient funds for the transaction. It can also be useful when purchasing a property that may not meet some of the property requirements associated with certain government-backed loans.

Cedar & Moss Tip: Don't assume you need 20% down to buy a home with conventional financing. Ask your lender to show you the available options at several down-payment levels and compare the total monthly payment.

FHA Loans

FHA loans are mortgages made by approved lenders and insured by the Federal Housing Administration. FHA financing is designed to make homeownership accessible to a broad range of qualified borrowers.

One of the best-known features of FHA financing is the possibility of a relatively low down payment for borrowers who meet applicable requirements. FHA loans may also accommodate borrowers whose credit profiles make certain conventional financing options more difficult.

FHA loans generally require mortgage insurance, including an upfront mortgage insurance premium and an annual mortgage insurance premium typically incorporated into monthly payments. How long the annual mortgage insurance remains depends on the loan's terms and applicable FHA rules.

The property itself must also satisfy FHA requirements.

An FHA appraisal isn't the same thing as a home inspection, but the FHA appraisal process includes certain property-related requirements in addition to establishing value. Conditions affecting safety, security, or soundness may need to be addressed before the loan can close.

FHA loans may offer:

• Relatively low down-payment options for qualified borrowers
• More flexible credit standards than some conventional programs
• Fixed-rate mortgage options
• The ability to use certain allowable gift funds toward the transaction
• Financing designed primarily for owner-occupied properties

Buyers should also consider:

• Upfront and annual mortgage insurance requirements
• FHA loan limits
• Property eligibility and condition requirements
• Appraisal requirements
• Occupancy requirements

Who might consider an FHA loan?

FHA financing can be worth exploring for first-time buyers, buyers with limited funds available for a down payment, or borrowers whose financial profile doesn't fit their preferred conventional loan program.

However, FHA loans aren't only for first-time home buyers. A buyer may potentially use FHA financing even if they have owned a home before, provided they meet the program's applicable requirements.

Cedar & Moss Tip: If you're considering an older home or one that needs repairs, discuss the property's condition with your lender and real estate agent early. A home can be perfectly acceptable to a buyer while still having an issue that affects a particular loan program.

VA Loans

VA loans are mortgages made by private lenders and backed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and certain other eligible borrowers.

For buyers who qualify, VA financing can offer significant advantages.

One of the most recognized benefits is the potential to purchase a home without a down payment, subject to eligibility, lender approval, the property's value, and other program requirements.

VA loans also generally do not require monthly private mortgage insurance (PMI).

However, many VA borrowers pay a VA funding fee. The amount can vary based on the circumstances of the loan, and certain eligible borrowers may be exempt from the fee.

Like FHA financing, VA financing also involves property requirements. The VA appraisal considers value and whether the property meets applicable Minimum Property Requirements (MPRs).

A VA appraisal should not be treated as a substitute for an independent home inspection.

VA loans may offer:

• No down payment for eligible borrowers in qualifying circumstances
• No monthly PMI requirement
• Competitive interest rates
• Limits on certain borrower closing costs
• Fixed-rate and other approved financing options
• Potentially attractive refinancing opportunities for eligible borrowers

Buyers should also understand:

• VA eligibility requirements apply
• A Certificate of Eligibility may be needed
• A VA funding fee may apply
• The home generally must be intended for qualifying occupancy
• The property must satisfy applicable VA requirements
• The lender still evaluates the borrower's income, credit, debts, and ability to repay

Who might consider a VA loan?

Eligible veterans and service members should generally ask a knowledgeable lender to compare VA financing with their other options. Even buyers who have substantial savings or could qualify for conventional financing may find VA financing attractive because of its combination of down-payment and mortgage-insurance features.

Cedar & Moss Tip: Don't automatically rule out VA financing because you've previously used a VA loan. VA entitlement can sometimes be restored or reused depending on the circumstances. Ask a VA-experienced lender to review your eligibility.

USDA Loans

USDA loans are designed to promote homeownership in eligible rural and certain suburban areas and may provide qualified buyers with an opportunity to finance a home with no down payment.

The program most home buyers encounter is the USDA Rural Development Single Family Housing Guaranteed Loan Program.

One of the biggest misconceptions about USDA financing is that the home has to be located far out in the country or on a farm.

That's not necessarily the case.

Eligibility is based on USDA's geographic requirements, and some communities outside larger urban areas may qualify. This makes USDA financing particularly worth investigating when buying in parts of Southwest Louisiana.

However, both the borrower and the property must qualify.

USDA programs have household-income limits that vary based on location and household circumstances. The property must also be located within a USDA-eligible area and satisfy applicable program requirements.

USDA guaranteed loans generally include an upfront guarantee fee and an annual fee.

USDA loans may offer:

• No down payment for qualified borrowers and eligible properties
• Competitive financing terms
• Fixed-rate financing
• Opportunities for qualified buyers purchasing in eligible areas
• Financing specifically intended to encourage homeownership in qualifying communities

Buyers should also consider:

• Geographic property eligibility
• Household-income limits
• Primary-residence requirements
• Property requirements
• USDA and lender underwriting requirements
• Applicable guarantee and annual fees

Who might consider a USDA loan?

USDA financing can be especially attractive for buyers who meet the income requirements, want to minimize their down payment, and are considering homes in eligible areas.

Because eligibility can sometimes change from one location to another, don't assume a property qualifies simply because it appears rural.

Cedar & Moss Tip: If you're interested in a property outside the more densely populated portions of Southwest Louisiana, ask your lender to check USDA eligibility. You may have financing options you didn't realize were available.

Mortgage programs and requirements are subject to change. This information is provided for general educational purposes and is not mortgage, lending, financial, legal, or tax advice. Buyers should consult a qualified mortgage professional regarding current program requirements and their individual eligibility.