The Different Types of Mortgage Loans for Homebuyers

22.04.2019 16:54

Not all USA mortgage loans are created equally. USA mortgage guidelines outline available options with regards to particular real estate investments based on: property price, credit scores and location. The Federal Housing Finance Agency (FHFA) sets the USA mortgage limits.

Pros and Cons of Conventional mortgages

A conventional USA mortgage is a type of loan not secured by a government entity. Businesses such as banks, mortgage companies or credit unions offer conventional mortgages in the US. Other alternatives include government-sponsored enterprises. The only two US government-sponsored mortgage enterprises are the Federal National Mortgage Association (or Fannie Mae) and the Federal Home Loan Mortgage Corporation (or Freddie Mac)

A conventional mortgage loan can be conforming or non-conforming.

Conforming conventional USA mortgage

  • Guidelines are set the two government-sponsored enterprises Fannie Mae and Freddie Mac.
  • Secured with collateral
  • The maximum loan amounts are set by the FHFA
  • Loan amounts differ by county
  • This type of mortgage in America for foreigners is only available with residency permit
  • As of 2019, most counties generally offer a maximum of:
One unit property $484,350 
Two unit property  $620,200 
Three unit property $749,650
Four unit property $931,600 

Non-conforming conventional USA mortgage

  • Greater mortgage loan amounts
  • Unsecured loan
  • This type of mortgage in America for foreigners is available with a social security number
  • Does not follow FHFA guidelines
  • Most common loan type is known as jumbo USA mortgage
  • Designed to finance more expensive, high-end properties
  • Loan seekers should have a strong credit score
Pros  Cons 
Higher down payment means that equity is built up faster  Higher down payment is more challenging to achieve  
Higher down payments means less likely to have PMI* The money for the loan requires authentication 
Can be fixed or adjustable interest rates Low credit scores means higher interest rate
More open for negotiations Additional fees may be part of the loan terms
Loan is processed faster Non-refundable fee for loan application
Debt-to-income ratio is considered (could be a pro) Debt-to-income ratio is considered (could be a con) 
Fewer restrictions on applicant’s financial situation  Strict prepayment penalties

*Private mortgage insurance

Jumbo USA mortgages

The jumbo loan is a non-conforming conventional USA mortgage that exceeds the loan limits set by the FHFA. Jumbo loans are not purchased or securitized by Fannie Mae or Freddie Mac. Loan seekers are generally required to have strong credit scores. The down payment is between 10% and 20% of the total purchasing price (or more). The Jumbo loan is riskier to lenders since there is no guarantee from Fannie Mae or Freddie Mac, and the money amount is significantly higher. This type of mortgage in America for foreigners is available with a social security number.

Government-insured USA mortgages

A government-insured USA mortgage is a loan backed by the US government. This is done to ensure repayment to the bank should there be any mortgage payment issues. This type of mortgage in America for foreigners is available with permanent residence. There are three types of government-insured mortgage companies:

  1. The Federal Housing Authority (FHA loan)
  2. Department of Veterans Affairs (VA loan)
  3. US Department of Agriculture (USDA loan)
FHA VA  USDA
Eligible for those with low-to-medium income Eligible for American 
1. Veterans
2. Active duty military, 
3. National Guards, 
4. Spouses of veterans
Eligible for those with low-to-medium income
3.5% down payment 0% down payment 0% down payment
Mortgage insurance needed No Mortgage insurance  Mortgage insurance needed

Fixed-rate mortgages

A FRM USA mortgage loan one that includes a stable interest rate throughout the length of the loan term. This means that your loan payment stays the same each month.

Adjustable-rate mortgages

ARM USA mortgages, sometimes called variable-rate mortgages, have a periodically changing interest rate. This change corresponds with the financial index of the loan of the bank. This means that the monthly payment may increase or decrease  depending on the index rate of that month.

New construction loan

The new construction loan covers the cost of building a new house. In some cases, this includes major renovations to an existing home including the plot of land. The two most common new construction loan types are the construction-to-permanent loan and standalone construction loan.

Construction-to-permanent (C2P)  Standalone construction loan  
Converts to standard mortgage after construction Short term loan for funding home construction 
During construction only interest is paid When construction is finished, the loan is simply paid off 
Once the loan is closed, it cannot be undone easily  Must pay two sets of closing costs