Types of Home Loans

If you are interested in buying a house, it’s vital to get the appropriate kind of home loan. Not every loan is the same, so learning how to distinguish one from the other will enable you to make the appropriate selection for your financial circumstances.

At The Harvard State Bank, we know home loans can be a tricky topic. That’s why we want to help make it easy for you and to help you feel confident in the type of loan you choose.

Conventional Loans

A conventional loan is a popular choice among homebuyers. It can offer competitive rates and terms, and it’s not backed by the government, which means its requirements aren’t typically as strict. If you have a strong credit score and enough saved up for a down payment, a conventional loan could be a good choice for you.

Conventional loans fall into two categories: conforming and non-conforming.

• Conforming loans stick to the guidelines set by the Federal Housing Finance Agency (FHFA), including loan size limits.
• Non-conforming loans don’t follow those guidelines. Jumbo loans, which are used for higher-priced homes, are the most common type of non-conforming loan.

Who’s a good fit for a conventional loan? In general, a conventional home loan is best for buyers with solid credit, steady income, and the ability to make a down payment. If that’s you, this loan could check all your boxes.

Government-Backed Loans

Government-backed loans are designed to make buying a home more accessible. If you’re worried about your credit score or don’t have much for a down payment, government-backed loans could offer a path to homeownership.

There are three main types of government-backed home loans: FHA, VA, and USDA.

• Insured by the Federal Housing Administration, FHA loans are a good option if your credit score is lower or if you need a smaller down payment. The trade-off is that you’ll pay mortgage insurance, which increases your monthly cost.
• VA loans are designed for current or former members of the military. With no down payment or mortgage insurance required, VA loans are an excellent option for eligible veterans, active-duty service members, and their families.

• Tailored for those purchasing homes in rural areas, USDA loans don’t require a down payment. They can be a great option if you’re looking at homes outside of urban centers.

Government-backed loans offer flexibility that conventional loans might not, so they’re worth considering if you need a little more wiggle room when it comes to qualifications.

Fixed-Rate Mortgages

A fixed-rate mortgage gives you a stable, unchanging interest rate throughout the life of the loan. Whether you choose a 15-year or 30-year term, your monthly payments stay consistent, which makes budgeting easier.

The big benefit to a fixed-rate mortgage is the lack of surprises: you know exactly what you’re paying each month. That’s why fixed-rate mortgages are ideal for homeowners who are planning to stay in their home long-term, or for those who prefer financial stability.

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) initially starts with a lower interest rate for a fixed period—usually five, seven, or 10 years. After that, the interest rate changes periodically depending on current market trends, which means your monthly payments could go up or down.

An ARM could save you money in the short term if you’re not planning to stay in your home for the long haul. The lower initial rate may be appealing if you plan to sell or refinance before the rate starts to adjust, but it’s important to understand that your payments could increase once the adjustment period begins.

Jumbo Loans

If you’re looking at a high-value property that exceeds the limits set for conforming loans, a jumbo loan could be the right choice. These loans are larger than what’s allowed under FHFA guidelines, which makes them a bit riskier for lenders.

Because of that added risk, jumbo loans often require a higher credit score, a larger down payment, and more documentation. But if you’ve got your financial ducks in a row, a jumbo loan can help you purchase the home of your dreams. At The Harvard State Bank, we underwrite our own jumbo loans, which means we have the flexibility to offer customized solutions based on your needs.

Construction Loans

Planning to build your home from the ground up? A construction loan provides financing during the building process. Once construction is complete, the loan typically converts to a traditional mortgage. It’s a great option if you’re not buying an existing home and need short-term financing to cover the construction costs.

Renovation Loans

Want to make a fixer-upper into your dream home? If you plan to buy a house that needs some maintenance, a renovation loan might be your best option. Unlike juggling two separate loans, this loan aggregates the cost of the house and the improvements into a single mortgage, which makes management much easier.

How to Choose the Right Loan

With so many loan types out there, how do you choose the right one? Here are a few things to consider:

Credit Score

If you have strong credit, a conventional loan may offer better terms. If your score could use some work, FHA or other government-backed loans might be more accessible.

Down Payment

If you’ve saved enough for a large down payment, conventional and jumbo loans are solid options. If you need something lower, FHA, VA, and USDA loans are worth looking into.

How Long You Plan to Stay

If you intend on settling down for the long run, a fixed-rate mortgage makes the most sense. However, if you want to relocate in a few years, an ARM could help you save money.

Income & Budget

Think about how much you’re comfortable paying each month—both now and in the future. Where ARMs can vary, fixed-rate loan payments stay the same.

Start Your Homeownership Journey

Purchasing a home is a major commitment, and going with the correct financing makes all the difference. At The Harvard State Bank, we pride ourselves on guiding each client through the process. Our local knowledge and tailored approach ensure you get a mortgage solution catered to your needs.

Whether this is your first time buying a home or you want to upgrade your current one, Your Friends In Banking are ready to help you weigh your options! Get in touch with The Harvard State Bank today to see what home loan best matches your needs.