Differences Between Common Loan Types in Colorado
When it comes to mortgages, there are quite a few options to choose from, depending on what you need out of your mortgage product. It’s important to pick the right one for you, but it can sometimes be confusing. This is where our expert Lakewood mortgage lender team comes in. We work with you to find the mortgage loan that is right, and here is what you need to know about the most common types of loans available in Colorado.
Common Mortgage Loan Types
The most common mortgage loan types that we see a lot of are:
Conventional mortgages aren’t government-backed. They are the best option for people with good credit scores. They come in two types; a conforming loan and a non-conforming loan.
The conforming type fits into the FHFA standards which look at your credit, debt, and size of the loan you wish to borrow. The non-conforming type refers to mortgage loans that don’t fit the FHFA standards, but rather focus on borrowers who have unusual credit needs or wish to buy an expensive home.
Pros of conventional mortgages:
- They can be used for an investment property, second home, or primary home
- Even in times when rates are high, the cost to borrow is generally lower than other types of mortgage loans
- Once you have paid 20% equity into the home, you can cancel your private mortgage insurance
- For conventional mortgage backed by Fannie Mae and Freddie Mac, you can make a down payment as low as 3%
- Sellers are able to contribute to their closing costs
Cons of conventional mortgages:
- You need to have a credit score of 620 or more in most cases.
- You may need to make a higher down payment than you would for a government-backed mortgage.
- Your debt-to-income ratio can be no higher than 43%
- If your down payment is under 20%, you will more than likely have to pay PMI
- A lot of documentation is needed
The government has created mortgage options to help make it easier for people to afford to buy a home. They are the best option for people whose credit score is a bit lower than average and who aren’t able to make a large down payment These government-insured options are FHA mortgages, USDA mortgages, and VA mortgages.
FHA mortgages – these are backed by the Federal Housing Association. They have interest rates that are competitive. You will need a credit score of at least 580 to qualify for 96.5% financing and a down payment of 3.5%. Or, with a credit score of 500, you can qualify for a 10% down payment. You will have to pay 2 premiums towards mortgage insurance and you are able to contribute to your closing costs.
USDA mortgages – these are backed by the United States Department of Agriculture and were created for borrowers with low to moderate income. The home must be in USDA-eligible rural areas to qualify. There are some USDA mortgages that won’t require a down payment. You will need to pay some extra fees, however; an annual fee and an upfront fee of 1% of your mortgage amount.
VA mortgages – backed by the Department of Veteran Affairs, these loans are for individuals who have served or still serve, in the U.S. Military along with their families. They offer low-interest rates, are flexible, have no required credit score, and you won’t be required to make a down payment or pay PMI. You will need to pay a funding fee, however, which is a percentage of the amount of the mortgage.
Pros of government-insured mortgages:
- No large down payment required
- Can assist you in buying a home when you aren’t able to qualify for a conventional mortgage
- Flexible credit requirements
- Available to first-time and repeat buyers
Cons of government-insured mortgages:
- FHA loans have a mandatory mortgage insurance premium that you can’t cancel
- The borrowing limits are lower than a conventional loan, which can narrow down your choices in homes and areas
- The property being bought must be your primary home
- Borrowing costs can sometimes be higher
This type of loan is used in areas that are higher in cost and which fall outside of the borrowing limits set out by the FHFA. They are the best option for people who have an excellent credit rating and are trying to purchase an expensive property.
Pros of jumbo mortgages:
- Allows you to borrow more funds than a conventional mortgage
- Offers competitive interest rates
Cons of jumbo mortgages:
- You will need a credit score of at least 700
- A down payment of 10% to 20% is required
- Your debt-to-income ratio can be no more than 45%
- You will need to prove that you have a significant amount in assets or savings
- Requirements to qualify can be more in-depth0
With this type of loan, your interest rates are fixed for the duration of the mortgage. They are the best option for people who want their monthly repayments to stay the same for the entirety of the mortgage term.
Pros of fixed-rate mortgages:
- Makes it easier to budget your monthly expenses
- Your monthly repayments towards interest and principal will stay the same, even if interest rates in the market rise
Cons of fixed-rate mortgages:
- If rates fall below what your rate is, you would need to refinance the mortgage to get that lower rate
- You usually get a higher interest rate that an adjustable-rate mortgage
ARMs are less stable than fixed-rate mortgages because the interest rates change with the market rates. A majority of these mortgages will give you a fixed rate for the first few years before switching to an adjustable rate. These are the best option for people who won’t be staying in their homes for a long time and want payments that are lower for the short term. They also need to be comfortable with changing monthly payments that can rise from one month to the next.
Pros of ARM mortgages:
- You can save quite a bit on interest payments
- You typically have a lower fixed rate during a set period (typically the first few years)
Cons of ARM Mortgages:
- Your monthly repayments may be unaffordable if rates rise too high
- If property values drop it could make it harder for the homeowner to refinance the mortgage before the end of the fixed-rate period
If you want to know more about the available mortgage loans to choose from, give our Lakewood mortgage lender team a call today!