When it comes to buying a house, there are many types of mortgage loans available. But it’s not always easy to figure out which one is right for you. Organized by life stage and situation, we’ll walk you through 7 types of mortgage loans and when to use them.
Buying your first home is an exciting milestone, but it can also be stressful. Luckily, there are a variety of mortgage loans for first-time home buyers. And our Central Illinois-based mortgage loan officers can help you find the best option for you. Learn more about conventional mortgages, government-insured mortgage programs, and home loans from IHDA, the state’s housing authority.
A conventional home loan is not part of any government or state program. You can choose between a fixed-rate or adjustable-rate mortgage. Put at least 20% down to avoid a Private Mortgage Insurance (PMI) requirement. However, lower down payments are also an option with conventional mortgages. Once you reach 20% equity in your home, you may be able to have the PMI premiums removed from your monthly mortgage payments.
If you can qualify for a conventional mortgage as a first-time buyer, it’s generally the simplest and least costly home loan option.
FHA Mortgage Program
These home loans are available to all buyers who meet FHA credit qualifications. FHA loans are popular among first-time buyers because they offer up to 96.5% financing, meaning you can put as little as 3.5% down.
- Fixed and Adjustable-Rate Mortgages
- Flexible credit score requirements
- There is an upfront mortgage insurance premium, as well as annual premiums
- Must purchase a principal residence
- One-to-four unit structures are eligible
- FHA loans are insured by HUD
- The property must undergo an FHA inspection and appraisal
- The FHA mortgage maximum for a single-family house in Central IL is $420,680
FHA loans are a great option for first-time buyers who don’t have the credit score or down payment required to qualify for a conventional loan.
VA Purchase Loans
If you are a servicemember or veteran, you can use your home loan guaranty benefit to buy your first home. One of the primary benefits of a VA loan is that you can put as little as $0 down without having to pay a mortgage insurance premium. That’s why it’s a great option for a first-time buyer, though you can use your VA home loan benefit multiple times throughout your life. Complete benefits include:
- No down payment required
- Competitively low interest rates
- Limited closing costs
- No Private Mortgage Insurance (PMI)
- The VA home loan benefit can be used more than once
VA Loans are a great option for first-time buyers who want to put less than 20% down (or nothing down) without having to pay PMI. The first step to applying for a VA mortgage is to obtain a Certificate of Eligibility (COE).
USDA Home Loans
The Single-Family Housing Guaranteed program offers mortgages backed by the U.S. Department of Agriculture (USDA). While this often thought of as a “rural” program, some suburban areas are also eligible. Check your desired address here to determine property eligibility. You can obtain up to 100% financing, meaning no down payment. USDA borrowers must meet income-eligibility requirements and occupy the house as their primary residence.
IHDA Mortgage and Down Payment Assistance
The Illinois Housing Develpment Authority (IHDA) offers mortgage loans and down payment assistance to qualified homebuyers in Illinois. IHDA Mortgages are available to both first-time and non-first-time buyers. Pre-purchase education is required. IHDA mortgages are available statewide, including here in Central Illinois. You can pair your IHDA Mortgage with one of these IHDA programs for down payment assistance, closing costs, or both:
- IHDAccess Forgivable Mortgage: No monthly payment on this forgivable down payment assistance loan of up to 4% of the purchase price or $6,000.
- IHDAccess Deferred Mortgage: No monthly payment on this deferred down payment assistance loan of up to 5% of the purchase price or $7,500.
- IHDAccess Repayable Mortgage: Zero-interest, repayable down payment assistance loan of up to 10% of the purchase price or $10,000.
To qualify for IHDA’s mortgage programs, you need a credit score of at least 640, a debt-to-income ratio of 45% or lower, and to contribute a minimum of 1% of the sale price or $1,000. Your income and home purchase price must also fall within current limits.
Eventually, first-time home buyers grow out of their starter home and need to upsize. Consider these mortgage loans when you’re ready to buy your next, bigger house.
If you have enough equity in your current home to make a 20% or higher down payment on your next home, a conventional mortgage is a great option. You won’t have to pay PMI and you can choose to lock in your interest rate with a fixed-rate mortgage or opt for an ARM loan instead.
While conventional mortgages conform to the maximum loan amounts set by Fannie Mae and Freddie Mac, jumbo loans are non-conforming, meaning you can borrow more than the maximum. This could be helpful if you are trying to upsize in an expensive real estate market.
Conforming loan limits are set each year by the Federal Housing Finance Agency (FHFA). As of this writing, the limit for one-unit properties in most of the U.S. is $726,200. So, if you need to borrow more than that, a jumbo loan would be your best option.
Because jumbo loans are riskier for lenders, the requirements to qualify for a jumbo loan are more stringent than for other mortgage programs. You’ll need a high credit score, a low debt-to-income ratio, and ample cash reserves.
Balloon Reset Loans
A balloon mortgage could help you upsize by offering an initial period of low or interest-only payments on your loan. A “Balloon Reset” mortgage means your loan will reset after a certain amount of time and become more like a conventional loan with a monthly payment amount that will actually pay off the loan after a certain period of time.
Balloon loans can be risky if you’re not able to afford higher payments after the initial period of low payments is over. This may not be an issue if you don’t plan to stay in the house long-term, but think carefully about the pros and cons before choosing a balloon reset loan.
There are seasons of life for upsizing and seasons when you no longer want or need all that space. The best loan for downsizing is probably a Conventional Mortgage. If you’re selling a bigger home to downsize, you’ll probably have plenty of cash to put 20% or more down.
Of course, veterans can use their VA home loan benefit more than once. A VA loan with 100% financing could help you conserve cash for other needs, especially if you’re embarking on retirement.
Moving To Illinois
Relocating to Central Illinois? Moving to a new state can be expensive. Consider a mortgage with down payment or closing cost assistance, such as IHDA loans, or a low down payment home loan such as FHA, VA, or USDA mortgages.
Moving with Less Than Ideal Credit
Things happen and sometimes your credit score isn’t what you’d like it to be. Luckily, there are still mortgage options for when you need to move with less than ideal credit.
- FHA Loans: You can have a credit score as low as 500 as long as you can put 10% down.
- USDA Loans: This mortgage program doesn’t have credit score requirements. You just need to show your ability to make mortgage payments.
Speak with a mortgage loan officer in Central Illinois!
Not sure which type of home loan is best for your specific situation? Get expert advice from our Central Illinois mortgage loan officers. Contact a lender today! Looking for more information on the home buying process? Check out our blog articles on “6 Tips To Save For A Down Payment” and “How Much Money Do You Need To Buy A House in Illinois?”