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Complete Guide To Types Of Mortgage Loans: Which Is Right For You?
- Darci Wise
- Jul 24
- 14 min read
"Which type of home loan should I get?"
It's one of the most common questions I hear from Grove City homebuyers, and honestly, it's one of the most important decisions you'll make during the home-buying process. The types of mortgage loans you choose affect everything from your down payment and monthly payments to your interest rate and long-term costs.
As a real estate agent in Grove City who works with both first-time homebuyers and experienced buyers, I've seen how the right mortgage loans can make homeownership possible for families who thought it was out of reach.
I've also seen buyers choose the wrong loan type and end up paying thousands more than they needed to.
Here's the thing about home loans—there's no one-size-fits-all solution. What works perfectly for your neighbor might be completely wrong for your situation.
That's why in this blog, I want to walk you through every major loan type available, explain the real benefits and drawbacks of each, and help you understand which might be the best fit for your specific circumstances.
As one of the experienced Grove City real estate agents, I work closely with local mortgage lenders to ensure my clients understand all their options.
Let's dive into everything you need to know about types of mortgages, so you can make an informed decision that saves you money and helps you get into your Grove City home.
Understanding the Basics: How The Types Mortgage Loans Work
Before we get into specific loan types, let's cover the fundamentals. When you get a mortgage, you're borrowing money to buy a home and agreeing to pay it back over a set loan term (usually 15 or 30 years) with interest. The mortgage lender uses the home as collateral, which means if you can't make mortgage payments, they can foreclose on the property.
Your monthly mortgage payment typically includes four components, often called PITI:
Monthly principal: the amount you borrowed
Interest payment: the cost of borrowing the money
Property tax: collected by your lender
Insurance: homeowners' insurance (and mortgage insurance if required)
Does that all make sense? Pretty simple, right? I wish. Otherwise, why would I need to put together this ultimate guide to mortgage loans?
Now, let's explore the various home loans available to buyers in Grove City.
Conventional Loans: The Most Common Choice
What Are Conventional Loans?
Conventional loans are mortgage loans that aren't backed by government agencies, such as the Federal Housing Administration (FHA) or the Veterans Affairs (VA). They're the most popular types of mortgage loans, accounting for approximately 75% of all mortgages.
These conforming loans are available through banks, credit unions, and mortgage companies, and they adhere to guidelines established by Fannie Mae and the Federal Housing Finance Agency.
Benefits of Conventional Loans
Lower Total Cost Over Time
Conventional mortgage loans often have lower interest rates than government-backed loans, especially if you have a good credit score. Over the life of a 30-year mortgage, even a 0.25% difference in loan interest rates can save you tens of thousands of dollars.
No Upfront Mortgage Insurance Premium
Unlike FHA loans, conventional loans don't charge an upfront mortgage insurance premium. You only pay private mortgage insurance (PMI) if your down payment is less than 20%, and you can cancel PMI once you reach 20% equity.
Higher Conforming Loan Limit
In Grove City, conforming loans limits are typically higher than government-backed loans, giving you more purchasing power if you're looking at higher-priced homes.
Flexible Property Types
Conventional loans can be used for primary residences, second homes, and investment properties. They're also available for condos, townhomes, and multi-unit properties.
Drawbacks of Conventional Loans
Higher Minimum Credit Score Requirements
Most mortgage lenders require a minimum credit score of 620 for conventional loans, with better interest rates available for credit scores above 740. This higher minimum credit score requirement can exclude some borrowers.
Larger Down Payment Options
While you can get a conventional loan with as little as 3% down payment, you'll pay private mortgage insurance until you reach 20% equity. Many buyers choose to put down a larger down payment to avoid this extra cost.
Stricter Debt-to-Income Requirements
Conventional loans typically require your total monthly debt payments (including the new mortgage) to be no more than 43% of your gross monthly income.
When Conventional Loans Make Sense
Conventional loans are ideal if you:
Have a credit score of 620 or higher
Can afford a down payment of at least 3%
Have stable employment and income
Want the lowest possible interest rate
Plan to stay in the home for several years
Federal Housing Administration Loans: First-Time Buyer Friendly
What Are FHA Loans?
FHA loans are backed by the Federal Housing Administration, which means the government-backed loan guarantees the mortgage if you default. This reduced risk allows mortgage lenders to offer more flexible qualification requirements, making homeownership accessible to buyers with lower credit scores who might not qualify for conventional financing.
Benefits of FHA Loans
Low Down Payment Requirements
FHA loans allow down payments as low as 3.5% if your credit score is 580 or higher. Even with lower credit scores between 500-579, you might qualify with a 10% down payment.
More Flexible Credit Requirements
FHA loans are available to borrowers with credit scores as low as 500, though most mortgage lenders prefer scores of 580 or higher for the best terms.
Gift Funds Allowed
FHA loans allow your entire down payment and closing costs to come from gift funds from family members, making it easier for first-time buyers to get into homes.
Assumable Loans
FHA loans can be transferred to a new buyer when you sell your home, which can be valuable if interest rates have risen since you got your loan.
Drawbacks of FHA Loans
Mortgage Insurance Requirements
FHA loans require borrowers to pay both an upfront mortgage insurance premium, which is 1.75% of the loan amount, and ongoing annual mortgage insurance premiums that generally remain in effect for the duration of the loan.
Lower Loan Limits
FHA loan limits in our area are lower than conforming loan limits, which might restrict your purchasing power for higher-priced Grove City homes.
Property Requirements
FHA loans have stricter property condition requirements. The home must meet FHA standards, and some properties might need repairs before the loan can be approved.
Primary Residence Only
FHA loans can only be used for primary residences, not for second homes or investment properties.
When FHA Loans Make Sense
FHA loans are perfect if you:
Have a credit score below 620
Can only afford a small down payment
Are a first-time homebuyer
Need gift funds for your down payment
Don't mind paying mortgage insurance for the life of the loan
As a Grove City realtor who works with many first-time buyers, I often recommend exploring FHA loan options if conventional financing isn't available.
VA Loans: Exclusive Benefits for Veterans
What Are VA Loans?
VA loans are guaranteed by the Department of Veterans Affairs and available to eligible veterans, active-duty service members, and some surviving spouses. These government-backed loans offer some of the best terms available in the mortgage market.
Benefits of VA Loans
No Down Payment Required
VA loans enable eligible veterans and service members to buy homes without making a down payment, making homeownership more accessible right away.
No Private Mortgage Insurance
VA loans don't require monthly mortgage insurance, which can save hundreds of dollars per month compared to other low-down-payment options.
Competitive Interest Rates
VA loans typically offer interest rates that are 0.25% to 0.5% lower than conventional loans, saving thousands over the loan term.
No Prepayment Penalties
You have the option to pay off your VA loan early without facing any penalties, which can help you reduce the amount of interest you pay if your financial situation improves.
Reusable Benefit
In most cases, you can use your VA loan benefit multiple times throughout your life, making it easier to move or upgrade homes.
Drawbacks of VA Loans
Eligibility Requirements
VA loans are only available to qualified veterans, active-duty service members, and eligible surviving spouses. You'll need a Certificate of Eligibility (COE) to apply.
VA Funding Fee
Most VA loans require a VA funding fee that ranges from 1.4% to 3.6% of the loan amount, depending on your down payment and whether it's your first VA loan. This fee can be rolled into the loan amount.
Primary Residence Only
VA loans can only be used for primary residences, not for investment properties or second homes.
Property Requirements
The property must meet VA minimum property requirements (MPRs), and you'll need a VA appraisal to ensure the home meets these standards.
When VA Loans Make Sense
VA loans are ideal if you:
Are an eligible veteran, active-duty service member, or qualifying spouse
Want to buy with no down payment
Want to avoid monthly mortgage insurance
Are you buying a primary residence
Want the lowest possible interest rate
As a realtor in Grove City, I work with many veterans and help them understand how VA loans can provide significant savings compared to other types of mortgage loans.
USDA Loans: Rural and Suburban Opportunities
What Are USDA Loans?
USDA loans are backed by the United States Department of Agriculture and designed to promote homeownership in rural and suburban areas. Many areas around Grove City may qualify for USDA financing.
Benefits of USDA Loans
No Down Payment Required
USDA loans enable qualified buyers to purchase homes without needing a down payment, making homeownership more attainable in eligible rural and suburban regions.
Low Interest Rates
USDA loans typically offer competitive interest rates, often lower than conventional loans.
Low Mortgage Insurance
USDA loans require a guarantee fee that's typically lower than FHA mortgage insurance premiums.
Flexible Credit Requirements
While USDA doesn't set minimum credit score requirements, most lenders look for scores of 640 or higher.
Drawbacks of USDA Loans
Geographic Restrictions
USDA loans can only be used in USDA-designated rural and suburban areas. Many areas around Grove City qualify, but you'll need to check the USDA eligibility map.
Income Limits
USDA loans impose income restrictions based on the median income of the area. Your household income must not exceed 115% of the area's median income to qualify.
Primary Residence Only
USDA loans can only be used for primary residences, not for second homes or investment properties.
Processing Time
USDA loans can take longer to process than conventional or FHA loans due to additional government oversight.
When USDA Loans Make Sense
USDA loans are perfect if you:
Want to buy in a USDA-eligible area around Grove City
Meet the income requirements
Want to buy with no down payment
Are you purchasing a primary residence
Don't mind a potentially longer closing process
Jumbo Loans: For Higher-Priced Homes
What Are Jumbo Loans?
Jumbo loans are conventional mortgage loans that exceed the conforming loan limits set by the Federal Housing Finance Agency. In our area, the 2024 conforming loan limit is $766,550 for most counties. These non-conforming loans require higher borrowing costs but allow for larger purchase prices.
Benefits of Jumbo Loans
Higher Loan Amounts
Jumbo loans allow you to borrow more than conforming loan limits, making it possible to buy higher-priced homes in desirable Grove City neighborhoods.
Competitive Interest Rates
Despite being non-conforming, jumbo loans often offer competitive loan interest rates, especially for well-qualified borrowers with high credit scores.
Flexible Terms
Jumbo loans are available with various loan terms, including 15, 20, and 30-year options, and both fixed-rate and adjustable-rate options.
Drawbacks of Jumbo Loans
Stricter Requirements
A jumbo loan typically requires higher credit scores (usually 700+), larger down payments (often 10-20%), and lower debt-to-income ratios than conforming loans.
Higher Borrowing Costs
Jumbo loans may have higher interest rates than conforming loans, and they typically require larger down payments (in cash) and higher monthly payments.
No Government Backing
Jumbo loans aren't backed by government agencies, so mortgage lenders take on more risk and may have stricter qualification standards.
When Jumbo Loans Make Sense
Jumbo loans are ideal if you:
Are you buying a home above the conforming loan limit
Have excellent credit and substantial income
Can afford a larger down payment
Want to buy in higher-priced neighborhoods
State and Local First-Time Buyer Programs
Pennsylvania Housing Finance Agency (PHFA) Programs
Pennsylvania offers several programs to help first-time buyers, including:
Keystone Home Loan Program
Low-interest-rate loans for first-time buyers
Down payment and closing cost assistance available
Income and purchase price limits apply
HFA Preferred Risk Sharing Program
Conventional financing with reduced mortgage insurance
Available for first-time and repeat buyers
Income limits may apply
Local Grove City and Butler County Programs
Many local governments and organizations offer down payment assistance and special loan programs to help individuals purchase a home. These change frequently, so it's worth checking with:
Local credit unions
Nonprofit housing organizations
Benefits of State and Local Programs
Down Payment Assistance
Many programs offer grants or low-interest loans to help with down payments and closing costs.
Below-Market Interest Rates
Some programs offer reduced interest rates for qualified buyers.
Flexible Qualification Requirements
State and local programs often have more flexible credit and income requirements than traditional loans.
When State and Local Programs Make Sense
These programs are perfect if you:
Are a first-time homebuyer
Meet income and purchase price requirements
Need help with down payment or closing costs
Qualify for special programs (teachers, healthcare workers, etc.)
Fixed-Rate vs. Adjustable-Rate Mortgages
Understanding the difference between fixed-rate mortgages and adjustable-rate mortgage options is crucial when choosing among types of mortgage loans.
Fixed-Rate Mortgages
A fixed-rate mortgage maintains the same interest rate and monthly payments throughout the entire loan term. This creates a predictable monthly payment that never changes.
Benefits:
Very predictable monthly payment structure
Protection against rapidly rising interest rates
Easier budgeting and financial planning
The same interest rate for the life of the loan
Drawbacks:
Higher initial interest rates than adjustable-rate loans
No benefit if interest rates fall
Higher monthly payments compared to initial adjustable rate payments
Adjustable-Rate Mortgages (ARMs)
Adjustable-rate loans begin with a fixed rate for an initial period (typically 3, 5, 7, or 10 years), after which the rate adjusts annually based on market conditions. This means mortgage payments fluctuate after the initial period.
Benefits:
Lower initial interest rates than fixed-rate loans
Initial low monthly payments
Potential savings if rates stay low or decrease
Good for buyers planning to move within the initial fixed period
Drawbacks:
Uncertainty about future mortgage payments
Risk of higher monthly payments if rates rise
More complex loan terms and conditions
Potential for significantly higher borrowing costs over time
When Each Makes Sense
Choose a Fixed Rate Mortgage Loan If You:
Plan to stay in the home long-term
Prefer predictable monthly payment stability
Are concerned about rapidly rising interest rates
Want simpler loan terms
Choose Adjustable Rate Loans If You:
Plan to move or refinance within the initial fixed period
Want lower initial monthly payments
Believe interest rates will stay stable or decrease
Can handle payment uncertainty and potential higher monthly payments
Special Loan Types: Construction and Interest-Only Options
Construction Loans
Construction loans are short-term financing used to build a new home. These loans typically convert to permanent mortgage loans once construction is complete. Construction loan terms are usually 6-12 months with higher interest rates during the building phase.
Interest-Only Loans
Interest-only loans allow borrowers to make interest-only payments for a set period (usually 5-10 years) before converting to principal and interest payments. While most interest-only loans offer lower initial payments, they result in higher borrowing costs over time and don't build equity during the interest-only period.
Important Note: Interest-only mortgage options can be risky because:
No equity building during the interest-only period
Higher payments when the loan converts
Potential for negative equity if home values decline
Most interest-only loans are adjustable-rate products
How to Choose the Right Loan Type
Step 1: Assess Your Financial Situation
Credit Score Requirements
740+: You'll qualify for the best conforming loan interest rates on any loan type
620-739: Conventional loans and government-backed loans are available
580-619: Focus on FHA loan or VA loan options
Below 580: FHA loans with higher down payments or work on improving credit scores
Down Payment Available
20% or more: Conventional loans offer the best terms without mortgage insurance
10-19%: Conventional loans with private mortgage insurance or VA loans
3.5-9%: FHA loan, VA loan, or USDA loan options
Less than 3.5%: VA loans or USDA loans only
Income and Employment
Stable employment: Any type of mortgage available
Self-employed or variable income: May need specialized loan programs
High debt-to-income ratio: Government-backed loans may be more flexible
Step 2: Consider Your Long-Term Plans
How Long You'll Stay
7+ years: Fixed-rate mortgage options usually make sense for predictable monthly payments
3-7 years: Consider adjustable-rate mortgage for lower initial costs
Less than 3 years: Renting might be better than any mortgage loans
Future Income Expectations
Expecting income growth: You might handle an ARM or higher monthly payments
Income likely to remain stable: Fixed-rate loans provide payment security
Income might decrease: Choose the most affordable mortgage payment option
Step 3: Calculate Total Costs
Don't just look at monthly payments when comparing types of mortgage loans. Consider:
Interest rates and total interest payment over the loan term
Mortgage insurance costs and insurance premiums
Upfront fees and closing costs
Potential future rate changes with adjustable rate loans
Step 4: Get Pre-Qualified with Multiple Lenders
Different mortgage lenders may offer different interest rates and terms for the same loan type. Shop around and compare:
Interest rates and loan interest rates
Annual Percentage Rate (APR)
Closing costs and fees
Mortgage lender fees and service quality
Customer service and communication
Working with Local Grove City Lenders
As one of the experienced Grove City real estate agents, I work with several reputable local mortgage lenders who understand our market and offer competitive loan interest rates and excellent service. Local mortgage lenders often provide:
Faster Processing
Local lenders can often close home loans more quickly than large national banks, helping you secure better purchase prices in competitive situations.
Personal Service
You'll work with the same mortgage lender throughout the process, not a call center, ensuring better communication about your mortgage payments and loan terms.
Local Market Knowledge
Local lenders understand Grove City property values and market conditions, making the approval process smoother for all types of mortgage loans.
Flexible Underwriting
Local mortgage lenders may be more flexible with unique situations or property types, especially for borrowers with lower credit scores or non-traditional income sources.
Red Flags to Avoid
Predatory Lending Practices
Watch Out For:
Pressure to take a larger loan than you need
Unusually high interest rates or fees
Prepayment penalties
Balloon payments
Interest-only loans (unless you understand the risks)
Lenders who don't verify your income or ability to repay
Signs of a Good Lender
Look For:
Licensed and regulated lenders
Clear explanations of all terms and costs
Willingness to answer questions
Reasonable time to review documents
Competitive rates and fees
Good reviews and references
Next Steps: Getting Started
1. Check Your Credit
Get free credit reports from all three bureaus and review them for errors. If your score needs improvement, consider waiting to buy while you work on it.
2. Calculate Your Budget
Determine how much you can afford for a down payment, monthly payment, and closing costs. Don't forget to factor in property taxes, insurance, and maintenance costs.
3. Get Pre-Qualified
Contact several lenders to get pre-qualified for different loan types. This will help you understand your options and buying power.
4. Choose Your Loan Type
Based on your financial situation, plans, and the information in this guide, decide which loan type makes the most sense for you.
5. Find a Knowledgeable Real Estate Agent
Work with a Grove City real estate agent who understands different loan types and can help you navigate the home-buying process.
Ready to Explore Your Home Loan Options?
Choosing the right types of mortgage loans is one of the most important financial decisions you'll make. The loan type you select affects everything from your monthly payments to your long-term wealth building and overall borrowing costs.
As a realtor in Grove City who works with first-time homebuyers and experienced buyers, I understand how overwhelming all these mortgage loan options can seem. That's why I take time to help my clients understand their financing options and connect them with trusted local mortgage lenders who offer competitive loan interest rates and excellent service.
Whether you're just starting to think about buying a home or you're ready to get pre-qualified for specific types of mortgages, I'm here to help you navigate the process and make informed decisions that serve your long-term interests.
Understanding the differences between fixed-rate mortgages and adjustable-rate mortgages, along with various government-backed loan programs, will help you select the best option for your specific situation.
Ready to get started? Call or text me at (724)-992-4128, or visit my website to schedule a consultation. Let's discuss your goals, explore your loan options, and develop a plan to help you achieve your Dream of owning a home in Grove City. Isn't it time you loved where you live?
Frequently Asked Questions
Can I change loan types after getting pre-qualified?
Yes, you can switch loan types during the application process, though it may delay your closing. It's best to explore all options with your lender upfront.
What type of loan is best suited for first-time buyers?
It depends on your situation. FHA loans are popular for their low down payment requirements, while VA loans are unbeatable for eligible veterans. Conventional loans can work well if you have good credit and some savings.
How much of a difference does the interest rate make?
A lot! On a $250,000 loan, a 0.5% difference in interest rate costs about $25,000 over 30 years. That's why shopping for the best rate is so important.
Can I combine different types of financing?
Some programs allow you to combine loans (like a first and second mortgage), but this is becoming less common. Most buyers use one primary loan type.
Should I pay points to lower my interest rate?
It depends on how long you plan to stay in the home. Points typically make sense if you'll be there long enough to recoup the upfront cost through lower monthly payments.
What if I don't qualify for any of these loan types?
There are other options, including seller financing, lease-to-own arrangements, and working to improve your credit and savings before applying again.
This guide provides general information about home loan types. Specific terms, rates, and requirements can change and vary by lender. Always consult with qualified mortgage professionals for current information and personalized advice.
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