dollar-sign coin card calculator money refresh home recycling verified check buy-home percent piggy-bank weighing-scale pen heart star exchange help padlock list usa earning quarantine close checklist cheers click cycle date exchange1 medal user equalhousing phone pie-chart Lifted Logic Web Design in Kansas City clock location phone play chevron-down chevron-left chevron-right chevron-up facebook checkbox checkbox-checked radio radio-selected instagram google plus pinterest twitter youtube send linkedin next arrow-right arrow-circle chevron-right-circle star-full plus phone-call new-window

Types of mortgage loans

Find Your Perfect Fit: Our Guide to the Different Types of Mortgage Loans

Resources / August 31, 2022

Despite what you might hear in TV ads, mortgage loans are no simple matter. There’s a lot of nuance between the different types of mortgage loans, and if you’re not familiar with each type, you might not end up with the best loan for your needs.

Fortunately, the home loan experts at First Mortgage Direct have your back. Whether you’re seeking a conventional 30-year mortgage, a VA Home loan, or an FHA loan, our mortgage lenders have the knowledge and understanding to help set you on the right path toward a better future.

Keep reading to learn more about the different types of mortgages, or contact us today to talk with a loan officer directly and begin your home-buying journey.

What is a mortgage? 

Simply put, a mortgage is a type of loan used to buy real estate, whether that be a home, land, or any other real estate. Exactly what type of mortgage you need, though, depends on various factors.

Mortgage types

Borrowers have a wide array of mortgage options at their disposal, but for the most part, they break down into these four categories:

  • Fixed-rate mortgages
  • Adjustable rate mortgages
  • FHA loans
  • VA loans

Each of these types of mortgage loans has advantages and disadvantages, while some have other circumstances that you must meet to qualify. Knowing which is the right loan type for your specific situation is tricky, and that’s why you need a home loan expert at your side during the entire home-buying process.

Related: Home loan tips from an online mortgage lender

Finding your perfect mortgage

Step 1: Gather your information

Ensuring you have the right documentation and information is a crucial primary step when determining which type of mortgage is best for your needs.

Here is a list of items you will need before determining which mortgage is the correct choice:

  • Pay stubs from the last 30 days
  • W-2s from current and past employers
  • Income tax returns
  • Alimony or child support
  • Bank statements from past two or three months
  • Retirement and investment account statements
  • Proof of rent payments over last 12 months
  • Government-issued identification
  • And more

Related: How much money do you need to buy a house?

Step 2: Think about your goals

Gathering all of your documentation is important, but almost as important is understanding your current situation and your goals for home buying. All of the numbers, documentation, and financial information won’t point you in the right direction without actually considering your wants and needs.

This is why you need a reliable home loan expert, like our mortgage specialists at First Mortgage Direct. We won’t just look at your numbers on paper; we take the time to get to know each and every one of our clients, so we know how best to fulfill their goals.

A good mortgage officer will help you take a good look at where you’re at in life. Where do you see yourself in 5 years? 10 years? Do you plan on starting a family soon? Do you move a lot for work, or are you planning to put down roots for a while?

We ask many questions just like these when meeting with prospective clients, all before even issuing a mortgage pre-approval. Our loan officers want to make sure you have the right loan that suits your needs now and for the future.

Related: What you should know about mortgage pre approval online

Step 3: Understand your options

We already mentioned the different types of mortgage loans and how each has its own uses. Even mortgage loans that seem similar—like a 30-year fixed rate mortgage and a 15-year fixed rate mortgage—can have subtle differences that make them ideal for certain situations.

Here is a breakdown of the different types of mortgage loans, who they best serve, and what qualifications they contain.

Fixed-rate mortgages

When talking about the difference between types of mortgage loans, how they handle interest rates is a big part of the conversation. With a fixed-rate mortgage, your loan’s interest rate is locked in place (or fixed) for the entire life of the loan.

The loan’s static nature makes it ideal for a wide range of situations, which is part of why they are the most popular type of mortgage loan in the United States. Every month your payment will be roughly the same, give or take some fluctuation due to local taxes or homeowners insurance. Your principal and interest rate remain steady for the life of your loan term.

Fixed-rate mortgages can be quite nuanced, given they’re a lengthier mortgage loan. Most conventional fixed-rate mortgage loans last 30 years, but there are also shorter-term options.

Who fixed-rate mortgages best serve

Our FMD mortgage loan officers typically recommend a fixed-rate mortgage for someone who wants to be in a home for a while. If you’re looking to put down roots, start or build your family, have a steady job that you don’t foresee leaving anytime soon. It takes out most volatility from your monthly payment.

Even if you’re not keen on signing a 30-year loan, there are options like a 15-year fixed-rate mortgage. These loans will contain a higher monthly payment, but they build your equity much faster, and you will ultimately end up with less interest paid overall.

A fixed-rate mortgage can have as little as a 3% down payment as well, so people who don’t have as much cash up-front can use this loan to offset that issue.

Qualifications

There is no special qualification to apply for a fixed-rate mortgage. There are some barriers, however, such as lower credit scores leading meaning higher interest rates. Most lenders require a credit score of at least 620-640 to apply for a conventional fixed-rate mortgage.

Related: What’s the best credit score for buying a house?

Adjustable-rate mortgage

If “fixed” in mortgage jargon means “stays in place the whole time,” then “adjustable” in this case is the exact opposite. An adjustable-rate mortgage is a home loan in which the interest rate can change based on a specific schedule, typically after a “fixed period.”

The inherent risk of this kind of loan is that once the fixed period is over, your monthly payment will fluctuate with the interest rate market. So say you sign up for a one-year adjustable rate mortgage on a 30-year loan, you would pay a different monthly payment every year when the rate resets.

Who adjustable-rate mortgages best serve

That’s a risky gamble, but there are reasons to take it. For example, if you’re planning on flipping a house quickly after renovations, an adjustable-rate mortgage gives you the flexibility to sign up at a lower interest rate and sell the home before it resets.

For potential homeowners looking for more flexibility but a longer fixed period, there are hybrid options available. These hybrid mortgages allow for fixed periods as long as 10 years. This is perfect for new homeowners who know they will likely look to upgrade within the first 10 years of their loan. Also ideal for people who have careers that move them around the country every few years.

Qualifications

There are no specific qualifications for an adjustable-rate mortgage.

FHA loans 

An FHA loan is a mortgage backed by the United States government to help make homeownership possible for borrowers who don’t have the means for a large down payment or excellent credit.

Not everyone is eligible for an FHA loan, which is why we do our due diligence when meeting with prospective clients by asking many different questions. Questions such as:

  • What is your credit score?
  • Is this your first time buying a home?
  • How long do you see yourself in this home?

Those answers will help us craft your perfect home loan, and let us know whether an FHA loan is right for you. 

Who FHA loans best serve

FHA loans are for potential homeowners with financial difficulties. It gives your lending agency flexibility in underwriting standards, so borrowers who might not qualify for other mortgages have a higher chance of becoming homeowners. FHA loans do require mortgage insurance, however, which protects the lender from a loss if the borrower defaults.

Qualifications

Borrowers can qualify for an FHA loan with a minimum of a 500 credit score with a 10% down payment, but a 3.5% down payment is acceptable for 580 credit scores and above. Here are a few other FHA loan qualifications:

  • Verifiable employment history for the last two years
  • Verifiable income through pay stubs, federal tax returns, and bank statements
  • Loan is for a primary residence
VA Loans

VA home loans are one of the major benefits our country provides for veterans. They include no required down payments, lower interest rates, no private mortgage insurance, and limited to no closing costs.

All uniformed service members are eligible for VA home loan benefits, including members of the Army, Navy, Air Force, Marines, Coast Guard, Space Force, National Oceanic Atmospheric Administration (NOAA), and Public Health Service.

We are dedicated to client satisfaction across the board, and part of that dedication means actually listening to our clients’ needs. This is especially important when it comes to VA loans. You sacrificed your time and put your life on the line to help keep this country safe, so the least we can do is help put you in the home of your dreams when you return to civilian life. 

Who VA loans best serve

The VA home loan program began in 1944 as part of the original GI Bill of Rights. It aimed to level the housing playing field for veterans returning from World War II.

For more than seven decades, lenders have served our nation’s veterans with affordable loans. We’re proud to provide veterans with quality mortgages, as well as advice on their entire homebuying journey.

Qualifications

VA loan qualification is earned through military service. There are factors that may affect eligibility, but generally speaking a service member is eligible for a VA loan if they have:

  • 90 days active duty during wartime
  • 181 days active duty during peacetime
  • 2 years for regular service members
  • 6 years for Reservists and National Guard members

More on VA loans at FMD

Find your perfect mortgage fit at FMD

Buying a home is one of the biggest financial decisions of your life. It’s important to have the right team to support you throughout the process.

Our experienced mortgage professionals at First Mortgage Direct are passionate about helping our clients with their first steps toward a better future.

Unlike other online mortgage lenders, our loan officers won’t try to fit you into a loan that’s not right for your situation. We are seasoned professionals in this industry with the experience to guide clients through the different types of mortgage loans. The end result leaves them satisfied with their purchase and confident in their decisions.

Contact us today to see how our honesty, integrity, and experience can help find you the right home loans.

A special thank you to our Mortgage Loan Originator, Don Baker, for providing his expertise on this topic.