Michael Phillip - Colorado Real Estate

Home Loans

Home Mortgage Loans

Home Mortgage Loan Types

When thinking of purchasing a home, determining how you will be financing that purchase should be your first step. This is typically done either by paying in cash, or through taking out a home loan, also called a mortgage. Or by using a combination of the two. If you will be financing part, or all, of your new home purchase, there are many options to choose from depending on your individual needs and situation.

Below I have listed the most common types of home loans, and their basic requirements and limitations. However, rates and terms do change, so this guide should only be used as a reference, and for more details, qualification criteria, and to determine which loan type will be best given your situation, consult with your lender. If you do not have a lender, reach out, I have worked with a few really great lenders and I would be more than happy to pass along their information to you!

You should also know, there are other unique home loan programs that can help with down payment assistance, or the Knock Home Swap program which can provide you with cash to buy a new home without having to sell first. Please click on the links to learn more about them.

Conventional Mortgage

  • A conventional home mortgage loan is not insured by the federal government
  • There are two types
    1. Conforming
      • The loan amount falls within maximum limits set by the Federal Housing Finance Agency.
    2. Non-conforming
      • Those that do not meet the guidelines of the Federal Housing Finance Agency. (ie, Jumbo loans)
  • If you put < 20% down of the homes purchase price, you will owe private mortgage insurance (PMI). 
  • This type of loan can be used for a primary home, second home, or investment property
  • Overall borrowing costs with a conventional loan tend to be lower than other types of mortgages, even if interest rates are slightly higher
  • You can ask your lender to cancel PMI once you’ve reached 20 percent equity
  • You can pay as little as 3% down on loans backed by Fannie Mae or Freddie Mac
  • Minimum FICO score of 620 or higher is often required
  • You must have a debt-to-income ratio of 45 percent to 50 percent
  • Significant documentation required to verify income, assets, down payment and employment
  • Current (Dec 2021) conventional loan limit for single-family homes in Denver and Douglas counties are $684,250, and in El Paso County is $647,200

Conventional home loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.

Jumbo Loans

  • A jumbo home loan are utilized when loan amounts exceed the max loan limits for a specific county
  • Interest rates tend to be competitive with other conventional loans
  • Down payment of at least 10 to 20 percent is needed
  • A FICO score of 700 or higher typically is required, although some lenders will accept a minimum score of 660
  • You cannot have a debt-to-income ratio above 45 percent
  • You must show you have significant assets (generally 10 percent of the loan amount) in cash or savings accounts
  • Jumbo loan is determined solely by how much financing you need, not by the purchase price of the property.

Government Backed Loans

  • FHA loans – Backed by the FHA, these types of home loans help make homeownership possible for borrowers who don’t have a large down payment saved up or don’t have pristine credit. Borrowers need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment; however, a score of 500 is accepted if you put at least 10 percent down. FHA loans require two mortgage insurance premiums: one is paid upfront, and the other is paid annually for the life of the loan if you put less than 10 percent down, which can increase the overall cost of your mortgage.
  • USDA loans – USDA home loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a downpayment for eligible borrowers with low incomes. 
  • VA loans – VA home loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. VA loans do not require a down payment or PMI (private mortgage insurance), and closing costs are generally capped and may be paid by the seller. A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program’s cost to taxpayers. This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing. However, the VA funding fee is waived with 10% or more of VA Disability.
    • If you are considering using a VA loan, your first step would be to check your Entitlement status, and receive your COE, or Certificate of Entitlement. You If you currently have full entitlement, there are no loan limits and you may borrow as much as you can qualify for. You have full entitlement if you meet any of these requirements:
      • You’ve never used your home loan benefit, or
      • You’ve paid a previous VA loan in full and sold the property (in this case, you’d have your full entitlement restored), or
      • You’ve used your home loan benefit, but had a foreclosure or compromise claim (also called a short sale) and repaid us in full

      However, if you do not have full entitlement, the current (Jan 2022) loan limits for a VA loan in Denver is $684,250, and Colorado Springs is $647,200. 

  • Read more on VA Loans 
  • The Home Buying Process Using a VA Loan

Pros of government-insured loans

  • They help you finance a home when you don’t qualify for a conventional loan
  • Credit requirements are more relaxed
  • You don’t need a large down payment
  • They’re open to repeat and first-time buyers

Cons of government-insured loans

  • Many of these loans have mandatory mortgage insurance premiums that cannot be canceled on some loans
  • You could have higher overall borrowing costs
  • Expect to provide more documentation, depending on the loan type, to prove eligibility

Government-insured loans are ideal if you have low cash savings or less-than-stellar credit and can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for qualified borrowers.

Fixed Rate Mortgages

  • With a fixed rate mortgage, your monthly principal and interest payments stay the same throughout the life of the loan
  • You can more precisely budget other expenses month to month
  • You’ll generally pay more interest with a longer-term loan
  • It takes longer to build equity in your home.
  • Interest rates typically are higher than rates on adjustable-rate mortgages
  • If you plan to stay in your home for at least seven to 10 years, a fixed-rate mortgage offers stability with your monthly payments

Adjustable Rate Mortgages

  • Adjustable Rate Mortgages, or ARM loans, have fluctuating interest rates that can go up or down with market conditions
  • Many offer fixed rates in the first few years of homeownership
  • Your monthly mortgage payments could become unaffordable if interest rates significantly increase, resulting in a loan default
  • If the home’s value falls in a few years, it could make it harder to refinance or sell your home before the loan resets
  • If you don’t plan to stay in your home beyond a few years, an ARM could save you big on interest payments.

Other Loan Types

  • Construction loans: If you want to build a home, a construction loan can be a good choice. You can decide whether to get a separate construction loan for the project and then a separate mortgage to pay it off, or wrap the two together. At least a 20% down payment is required (and sometimes higher). A comprehensive construction plan needs to be developed and shown to the lender. The projected home value must be approved by a licensed appraiser. 
  • State Bond Loan: State bond loans are paid out by using mortgage revenue bonds (MRBs). MRBs are used by local housing programs to spur first-time homebuyers to purchase in their area by locking people in at below-market interest rates. Must not have owned a home for a specific amount of time (usually three years). Income requirements must be met by the homebuyer. The home must be within a certain value range. The home that is being purchased must be your primary residence (this is a consistent requirement, everywhere).
  • Interest-only mortgages: With an interest-only mortgage, the borrower pays only the interest on the loan for a set period of time. After that time period is over, usually between five and seven years, your monthly payment increases as you begin paying your principal. With this type of loan, you won’t build equity as quickly, since you’re initially only paying interest. These loans are best for those who know they can sell or refinance, or for those who can reasonably expect to afford the higher monthly payment later. 
  • Balloon mortgages: Another type of home loan you may come across is a balloon mortgage, which requires a large payment at the end of the loan term. Generally, you’ll make payments based on a 30-year term, but only for a short time, such as seven years. At the end of that time, you’ll make a large payment on the outstanding balance, which can be unmanageable if you’re not prepared. 
  • FHA 203(k): The FHA 203(k) loan enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home. It insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less. 
This guide is for informational purposes only and rates, terms, qualifications can change at any time. Please speak with your lender to verify all information and to move forward with the application and approval process. If you do not have a lender, please contact me and I will be more than happy to assist you in finding a great one in your area and that works with the programs you are interested in.