What Are the Different Types of Home Loans That Exist Today?

What Are the Different Types of Home Loans That Exist Today?
Mortgage loan agreement application with house shaped keyring

Homeownership is the central piece of living the American Dream. It seems out of reach for many in this real estate market because home values have gone up so much over the last two years.

Now that interest rates have increased over the last few months, the market is starting to cool down. There’s been a lot of talk of cash buyers dominating the real estate market, making it harder to compete with other offers.

The fact is that 63% of homeowners have a mortgage. They utilize different types of home loans to achieve the dream of homeownership.

Once you learn the types of mortgages, you’ll be able to find the best home loans for your financial situation and get the home of your dreams.

Don’t worry because you’re in the right place to find out about getting the best home mortgage. Read on to discover the types of home loans and how to get approved for one.

Adjustable-Rate Loan

Interest rates are the talk of the town these days. That’s because after seeing record low-interest rates for the past couple of years, they’re going back up.

The Federal Reserve lowered interest rates to near-zero to keep the economy going during the pandemic. Now that the economy is open again, inflation increased to 40-year highs.

The Fed is looking to increase interest rates again to lower inflation and slow down economic activity.

What does that have to do with mortgages? Banks base their interest rates on the Federal Reserve’s rates.

Adjustable-rate loans are the most vulnerable when interest rates fluctuate like this. An adjustable-rate mortgage means that the interest rate changes at set intervals, either quarterly or annually.

If you get an adjustable-rate mortgage now, your payments will be low. In a year, you’ll end up paying more because of higher interest rates.

Fixed-Rate Home Loan

A fixed-rate home loan locks an interest rate down for the entire duration of the home loan. That’s why so many people were out buying homes over the last couple of years.

If you could buy a home, you could get a very low interest rate. Your payments would be low for the next 30 years.

Getting a fixed-rate home loan makes sense when interest rates are low and likely to increase. You also know how much your mortgage payments are, making it much easier to budget.

Government-Backed Mortgage

Do you have an average credit score and a little money saved for a down payment? You might think that you have no chance to get approved for a mortgage unless you have 20% down.

That’s not the case, thanks to government-backed loan programs. These are loans that you get through approved lenders. The government insures them, so the lender gets paid if you default on the loan.

These types of home loans are perfect for veterans and first-time homebuyers. The agencies that back these loans are the Federal Housing Administration, U.S. Department of Agriculture, and Department of Veterans Affairs.

VA loans are for military members, both active duty and veterans. You don’t need a down payment, minimum credit score, or mortgage insurance. That can save you thousands of dollars and make you a smart homeowner.

FHA loans let you finance a home with only 3.5% down if you have a good credit score. If you have a low credit score, you might be asked to put down 5% to 10% down.

It’s still a very affordable option to buy a home. You need to have a credit score of 580 to get the low down payment option, though that may vary depending on your income and credit history.

If you’re planning to purchase a home in a rural area, consider a home loan from the U.S. Department of Agriculture. These loans are to encourage growth in certain areas defined by the USDA.

You need to meet income requirements as well. If your income is low, you can purchase a home without a down payment.

Loans for Specific Professions

There are loans that target certain professions, such as doctors and lawyers. These are sought-after clients because they have high incomes.

Lawyers can get legal home loans that let you borrow more money and waive mortgage insurance. There may be additional discounts on interest rates if you qualify.

What if you’re self-employed? More people are freelancing because they want freedom and flexibility over their schedules.

Since freelancers have irregular incomes, banks tend to avoid home loans for freelancers. Some lenders recognize this is a growing market, so they’re creating loan programs for freelancers.

How to Get the Best Home Mortgage

Getting the best home mortgage largely depends on your credit score. Pull your credit score and make sure it’s accurate.

Correct errors and focus on ways to raise your credit score. Even if you have an excellent credit score, a couple of more points can get a better interest rate on your home loan.

Make your credit card and loan payments on time. Negative marks stay on your report for years and will hurt your ability to get a home loan.

Pay down your debt to lower the credit utilization rate. This is one of the fastest ways to raise your credit score and get approved for the perfect home mortgage loan.

Understanding the Types of Home Loans

Now that you know the different types of home loans, you can find the best home loans. You’ll be a smart homeowner in a good financial position because you choose the home mortgage loan that works for your financial situation.

Once you’re in your dream home, you’re going to need to make some changes. Check out the Home Improvement section of this site to get the latest home improvement trends.