5 Types of Home Loans: Mortgage Options for Homebuyers

Types of Home Loans

Getting the opportunity to buy a home is a dream come true for many. Not only does it allow you to own a valuable asset, it gives you the opportunity to enjoy your preferred lifestyle–  eliminating the worry that comes with picky landlords or the hassle of dealing with large, corporately owned housing communities.

While the benefits of owning your own property can be a separate article in and of itself, there is one major hang-up that keeps prospective owners in the cycle of renting and moving: financing.

Getting financing on your home can be a tedious and confusing process with each loan bringing its own complexities.

As custom, semi-custom, and spec home builders, we understand just how important it is to find the right financing; both for your present ability to afford a home and your long-term ability to maintain payments.

That’s why we have compiled a quick overview on the 6 most popular loan types that will hopefully save you some hassle and decide which loan will be right for you.

Conventional/Construction Loans

When applying for a mortgage, there are two main categories of loan to consider– conventional/construction loans and government loans.

The most common type of loan that will cross your path are conventional loans. These are loans which are not insured by the federal government, but by private mortgage insurance companies.

These mortgage loans are not bound by the government and they require you to pay private mortgage insurance when the equity paid into your property is under 20%. This protects the lender in case you default on your loan.

For individuals who are not able to put at least 20% down on their home, these additional fees might be the deciding factor against choosing a conventional loan. However if you are able to afford the initial down payment, there are two main types of conventional loan available.

Fixed rate

In this type of loan, the interest rate remains the same through the loans entire life. This has both positive and negative aspects for homeowners.

The main benefit to a fixed-rate mortgage is that homeowners can more accurately budget their monthly expenses without any shock of the interest rate going up. The downside of this stability is that lenders will often charge a higher interest rate on this type of loan overall.

Prospective home buyers will commonly opt for a fixed-rate mortgage when interest rates are low, or, when they are planning to stay in their home for over 10 years.

Adjustable rate

Adjustable Rate Mortgages (ARMs) are another type of conventional loan in which the interest rate regularly adjusts after certain intervals of time. Because of the financial risk involved with this type of loan, interest rates during the initial period of stability are commonly lower than fixed-rate loans of the same amount.

For most ARMs, rates will reset themselves after a certain period of time. After this period of time, the fixed-rate probationary period has elapsed. This is where fixed rate loans can get a little more complicated as the terms of this initial period will vary depending on your lender.

Generally speaking, ARMs are advised for individuals who are not planning on staying in their home for more than 7-10 years. This time-frame will allow for individuals to take advantage of the lower initial interest rates of their loan while selling the property before rates adjust to a higher bracket.

Construction Loans

This loan is the most relevant to Morgan Taylor Homes- the construction loan. This is the loan our Build On Your Lot homes require. A construction loan, also sometimes known as a self-build loan, is a short-term loan used to help finance the building of custom homes and real estate projects. The way this loan essentially works is the builder or home buyer takes out a construction loan to cover the costs of building before comprehensive funding is obtained. The lender will pay out the money in stages instead of all at once. These are short-term loans that usually last for about a year. The borrower of this loan might be required to pay this loan off completely before the end of construction.

While construction loans are oftentimes crucial to those that dream of building a home, one of the biggest downfalls of construction loans is the high interest rates. Many lenders also require a 20% minimum down payment and some even higher than that. Those with a limited credit history might have trouble getting approved for these types of loans.

Government Loans

The next loan category is called government loans. There are loans which are insured and backed by the federal government. Because of this, government loans are considerably more forgiving to individuals who have limited financial resources for an upfront payment or have a less than ideal credit score. Unfortunately, some types of mortgages in this category have a number of costly disadvantages as well, such as mandated mortgage insurance on the life of the loan.

While several options exist, the most common are FHA, VA, and USDA loans– all explained below.

FHA Loans

By far the most common type of government loan is an FHA loan. This loan type allows for individuals with an inability to put a large percentage down or with a low credit score to still realistically gain financing on their home. Unfortunately, FHA loans have several drawbacks such as:

  • Not all sellers or communities accept FHA loans
  • Because the loan is processed by the government, they take longer to approve
  • Mortgage insurance is required the duration of the loan, adding overall to your monthly payment

VA Loans

Backed by the Department of Veteran Affairs, VA loans come with several perks, but only if you qualify. The main benefits to this loan type is that it does not require a down payment, minimum credit score, private mortgage insurance, or a cap on the amount of money you are allowed to borrow.

The qualifications are as follows:

  • 90 consecutive days of active service in wartime
  • 181 consecutive days of active service in peacetime
  • You are currently in active duty military
  • You have been honorably discharged
  • You are a veteran

USDA Loans

This final loan type comes as a surprise to some- as it is backed by the same USDA that regulates food products. These loans help individuals looking to move into qualified, rural, areas, but do not have the upfront funds to do so.

The main purpose of this loan is to help low to middle-income families experience the benefit of homeownership in an affordable manner, so long as location and financial eligibility requirements are met.

To learn more about location eligibility requirements, check out the USDA’s eligibility page.

Homes Built For Everyone

Securing financing is one of the earliest steps in building your home. With our unique and streamlined build process, you will know early on exactly how much you need to finance, taking the guesswork out of your financing needs.

If you have any questions about financing, please reach out to your Morgan Taylor Homes representative and they will put you in touch with one of our excellent preferred lenders.

What is an Accessory Dwelling Unit?

By Erica | November 10, 2022

Are you in the process of building a home on your own lot and hearing the term “Accessory Dwelling Unit (ADU)” being thrown around? Or perhaps, you’re in the process of trying to figure out how to best care for your aging parents and are weighing your housing options, and an “Accessory Dwelling Unit” has …

What is an Accessory Dwelling Unit? Read More »

When is the Best Time to Buy a House in Arizona?

By Erica | October 26, 2022

Buying a house is always a big decision, and for many, it will be the biggest purchase they ever make. So buying a home is not a decision you want to make on a whim or take lightly. Smart buyers will do research about home buying when they begin their search, and even wiser buyers …

When is the Best Time to Buy a House in Arizona? Read More »

Best Places to Retire in Arizona

By Erica | October 12, 2022

As retirement is approaching, you may be beginning to consider your options for where you’d like to settle down in your golden years. Of course, sunny Florida is a popular option, or perhaps a coastal city such as Charleston. But are you ready for the humidity and flat terrain? If not, these locations may not …

Best Places to Retire in Arizona Read More »

Home Design Trends for Custom Homes in Arizona

By Erica | September 15, 2022

When you walk through a home that hasn’t been updated since the 70s, you know it. Wood paneling, upholstered furniture, sunken living rooms, and orange and green velvet are everywhere. These home design trends were all the rage in their time. But unfortunately (or fortunately), they faded out just as fast as they appeared. So …

Home Design Trends for Custom Homes in Arizona Read More »

Your Guide to Driveways: Alternative to Concrete

By Erica | August 23, 2022

If you have ever built your own home or made extensive renovations to an existing home, then you know there are hundreds if not thousands of choices to make and options to consider. It is honestly one of the primary reasons that homeowners turn away from new construction. But it can also be one of …

Your Guide to Driveways: Alternative to Concrete Read More »

5 Things to Consider When Purchasing a Lot

By Erica | August 9, 2022

Searching for your dream home can be quite a task. Especially when you just can’t seem to find a home that checks every box on your list. Of course, you can buy an existing home that is as close to perfect as possible and then complete renovations to your liking, but there is a better …

5 Things to Consider When Purchasing a Lot Read More »

5 Modern Kitchen Design Ideas For Seriously Upgrading Your Space

By Erica | July 21, 2022

Some design trends come and go, but one aesthetic that never goes out of style is sleek, modern design for the functional spaces in your home. Whether you’re an avid gathering host or you prefer a quiet night in, having the right modern kitchen design for your lifestyle can completely transform the overall look and …

5 Modern Kitchen Design Ideas For Seriously Upgrading Your Space Read More »

How To Buy A New Construction Home

By Erica | July 14, 2022

The home buying process can be an overwhelming experience, whether you’re a seasoned property owner or a first-time buyer. But if you’re ready to finally score your dream home and maximize the long-term benefits of this life-changing investment, then buying a new construction home is one of the easiest ways to build a stable, loving …

How To Buy A New Construction Home Read More »

5 Rustic Kitchen Design Ideas To Give Your Space A Cozy Makeover

By Erica | July 7, 2022

Your kitchen is the heart and soul of your home. But if modern minimalistic designs like these don’t exactly give you warm and fuzzy feelings, you might find yourself struggling to achieve the cozy kitchen corner of your dreams without compromising on great style. Sound familiar? Then it’s time to embrace the growing rustic kitchen …

5 Rustic Kitchen Design Ideas To Give Your Space A Cozy Makeover Read More »

Is Buying a House Advised Now with Rising Mortgage Rates?

By Erica | June 17, 2022

After a record low of 2.65% in 2021, forecasters projected mortgage rates to rise between 3.27% and 3.88% in 2022. Now they’re almost as high as 6% for the typical 30-year fixed mortgages. Normal variables that affect home-buying decisions may not necessarily apply this year due to unusual market fluctuations. High mortgage rates and other …

Is Buying a House Advised Now with Rising Mortgage Rates? Read More »