Loan Types 101: Mortgage Options for Florida Home Buyers
December 19, 2022
Let’s start with the basics: what is a loan?
A loan is a sum of money that an individual borrows from a financial institution such as a bank or mortgage firm. Over time, the borrower pays back this sum along with a specified amount of interest. The total amount of money that can be borrowed along with the interest rate and payback period are determined in different ways for different mortgage options.
While being able to afford a new home seems out of reach, with a loan, it’s possible!
Benefits of a loan can include fast approval and funding, extended payment terms, and predictable monthly payments. However, acquiring a loan does involve your credit score and several other eligibility factors.
Types of Loans
There are many different types of loans, and for those searching for the best option, it can be intimidating. We at The Mortgage Firm North Central Florida want to provide you with a complete breakdown of the most popular loans in the industry.
Conventional Home Loans
There are three main pieces to conventional home loans: credit score, debt-to-income ratio, and desired loan size. Once those are determined you’ll need to make an initial down payment. Going forward, your monthly payments will include private mortgage insurance, or PMI, and a fee that protects the lender if you default on the loan. If you decide to pay over 20% of your loan as the down payment, the insurance requirement will be void. Conventional loans also allow you to remove PMI as soon as your loan-to-value ratio hits 80%.
The private mortgage insurance on these loans makes up for them not being backed by the government. Because these loans are not backed by the government, they are seen as riskier loans, which is why they typically have a higher barrier to entry than other mortgage options.
Government Insured Mortgage Options
FHA HOME LOANS
These loans have the most accessible qualifications of any government loan because they don’t have any income requirements, and have a lower credit score requirement. For first-time buyers or those who have a poor credit history, this type of loan can be a great option.
However, an FHA loan does require an insurance premium. This amount is paid both upfront and monthly as a small percentage of the loan amount. The only way to void the insurance premium is to pay 10% of the mortgage as a down payment.
VA HOME LOANS
A VA home loan is an option for those who are active-duty service members, veterans, or eligible spouses of a veteran. While the borrower must meet these requirements, the government does not set a minimum credit score. This means that the lender has flexibility and is able to accept candidates with lower credit scores.
For those who are eligible, VA loans can be a way to get a new home with a low down payment or none at all. These loans require an upfront fee but no ongoing insurance costs.
USDA HOME LOANS
For those with low to moderate income, the standard USDA-guaranteed loan offers the benefit of no down payment. The insurance premium also amounts to a lower percentage than with an FHA loan. USDA loans are only available for homes in designated rural locations.
Outside of guaranteed loans, there are USDA direct loans, designated for low and very low-income applicants. They provide immediate payment assistance to qualified applicants as a way to reduce mortgage payments.
Fixed Rate Mortgage Options
With a constantly fluctuating economy, fixed-rate mortgages become a popular choice. These loans have an interest rate that will not change over the loan’s lifetime, meaning the borrower’s interest and principal payments will remain the same every month.
With this shorter-term loan, you’ll save yourself an extra 15 years of interest payments. These loans typically come with a lower interest rate than a 30-year loan but subsequently, your individual monthly payments will be higher with a shorter timeframe.
Choosing a 30-year fixed-rate mortgage allows you to pay smaller monthly amounts spread out over a longer period. Thus interest will cause your total cost to be higher but you have the ability to keep monthly payments low.
We have a more in-depth breakdown of 15-year loans vs. 30-year loans here!
Adjustable Rate Mortgage
The opposite of a fixed-rate mortgage is an adjustable-rate mortgage or ARM. ARMs have interest rates that periodically change. The individual rate’s value is determined using a benchmark system like the prime rate. To keep them in check, there is often a cap on the amount the rate can rise.
An ARM can be a smart financial choice for homebuyers who are planning to keep the loan for a limited period through moving or refinancing and can afford any potential increases in their interest rate.
When a lender issues a loan and keeps it within their investment holdings instead of selling to a secondary company it’s referred to as a portfolio loan. This gives the lender more flexibility in making decisions in regard to the loan.
It’s often said that people with a bad credit history cannot buy a home, but that is not always the case. Portfolio loans are an opportunity for those that have filed for bankruptcy, have bad credit, have tax issues, have a good income but lack credit, or have problems with the home they want to buy (such as failed inspection).
Doctor Loans (Physician Loans)
Healthcare professionals face numerous financial hurdles including a lack of cash, unemployment, no credit, and a bad debt-to-income ratio. With a doctor’s loan, the down payment and the insurance premium costs are waived.
If new doctors don’t meet the requirements for a conventional loan, a physician’s loan can be a great option for them to buy the home of their dreams!
Bank Statement Loans
Also known as a stated income loan, bank statement loans are unique in that they require different financial documentation. Instead of tax forms and W-2s, you provide your bank statements as proof of income. These loans are particularly useful for those who are self-employed and cannot fully prove their income through tax forms.
This may also be the loan for you if your employer doesn’t issue traditional paychecks, you claim high tax deductions, or your income is inconsistent.
Find the Loan For You With TMFNCF
When you’re ready to begin the process, don’t wait to consult professionals on the best financial options for you. We’ve helped hundreds of Florida home buyers purchase the home of their dreams and are only a call away to help you buy yours. Reach out to our mortgage team today to find the mortgage options that fit your family’s needs!