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Mortgage Loans

For many people, buying a house is one of the biggest decisions of their lives. They may be purchasing a private oasis away from the world, a backyard for their pets, or a home with room for their growing family. No matter the circumstances or specifics of each person's home buying experience, the process can be an emotional rollercoaster. It can also be pretty confusing. 

One of the most stressful and difficult parts of buying a home is figuring out how to pay for it. On  average, many people have little to no cash savings, and nearly 1 in 5 Americans didn’t save any money in 2021. Therefore buying a home in cash is simply not an option for most Americans, meaning the majority of homeowners rely on home mortgage loans. It’s only natural for prospective home buyers to have questions about the whole mortgage process. After all, there are lots of factors to consider and no two mortgages are exactly alike. That’s where we at Indiana Members Credit Union come in.

We are constantly working to demystify the financing and lending industry. To that end, in this article we are addressing some of the most common questions around mortgage loans like:

• What is a mortgage loan?
• What is the purpose of a mortgage loan?
• How many types of mortgages are there?
• How is a mortgage different from a regular loan?
• Who is the top mortgage lender?

And much much more. So without further ado, let’s dive in!

What Is a Mortgage?

In plain terms, a mortgage is a type of loan between a borrower (the home buyer) and a lender that allows you to secure money to purchase or refinance a home. From there the borrower and the lender will set up a payment plan that includes paying back the original amount (principal) plus interest in monthly installments over anywhere from 15-30 years. As a loan against property, mortgage agreements include stipulations that the house serves as collateral for the loan. That means if the borrower fails to repay the lender, then they have the right to seize the property.   

What Type of Loan Is a Mortgage Loan and How Is It Different from Other Loans? 

When comparing the term mortgage vs. loan, it’s important to understand that while all mortgages are loans, not all loans are mortgage loans. Think of it as another classic squares vs. rectangles example (all squares are rectangles but not all rectangles are squares). 

Typically speaking, mortgage loans are used specifically to finance property or real estate purchases. Mortgages are a form of “secured loan” meaning that the lender can feel more secure giving the money out because the loan is backed by collateral. As we mentioned earlier, in the case of a mortgage, the collateral or security is the property. That means that in the event the homeowner stops making payments on their mortgage, the lender can assume ownership of the home in a process known as a foreclosure. 

While some other loan types are also secure, it’s worth noting that some may be unsecure, meaning that there is no collateral associated with the loan. Additional differences between mortgages and some other loans include:

• Dollar amount- Mortgage loans tend to involve more money than many other loan types. One of the reasons for this is actually because the loan is secured by the property, meaning lenders don’t feel as risky giving out hundreds of thousands of dollars in loan money. 
• Period of time- Most mortgages typically account for 15 or 30 years of repayment. This is a substantially longer period of time than you might generally expect for other loan types like auto loans, payday loans, or student loans.  
• Requirements- Depending on the kind of loan someone is looking to take out, certain requirements are necessary. For example, some loans are only available to veterans, minority groups, or small businesses. Some might require certain documentation, income, credit scores, or more. It just depends on the loan type and its purpose.

What Is the Purpose of a Mortgage Loan?

From the borrower’s perspective, the purpose of a mortgage is to enable them to buy a home. From the lender's perspective (like ours at IMCU), a mortgage loan is a win-win scenario. They get to help the borrower fulfill their dream of becoming a homeowner or of upgrading their house, while also collecting interest in the process. 

As we mentioned earlier, for most prospective homeowners, it’s simply impossible to pay upfront for a home. At IMCU we don’t believe that should prevent you from becoming a homeowner though! After all, there are lots of benefits to homeownership like a sense of autonomy and the ability to build equity instead of waving goodbye to rent money. So for borrowers and lenders alike, mortgages offer a world of possibilities and opportunity.  

What Are the 5 Different Types of Mortgage Loans?

There are several types of mortgage loans, but most commonly, 5 are referred to. In an effort to provide the most comprehensive information for you, we are going to cover all 5 types of mortgage loans. They are: 

• Conventional 
• Jumbo
• Government-insured 
• Fixed-rate
• Adjustable-rate

Let’s take a look at each one individually, as well as their pros and cons.

Conventional Mortgages

Conventional mortgages, also known as conventional loans, are not backed by the government. They come in two different forms, conforming and non-conforming. 

Conforming conventional loans are (as the name implies) loans that conform to industry standards put in place by the Federal Housing Finance Agency (FHFA). In addition to the FHFA standards, conforming loans also meet the funding criteria set forth by Freddie Mac and Fannie Mae. Together these standards incorporate things like credit, debt, loan size, and more. 

For example, the FHFA limits for 2022 state that the maximum loan amount in most markets is $726,200, with higher limits for exceptionally pricey markets around the U.S. Similarly, Freddie Mac and Fannie Mae guidelines require things like:

• A credit score of at least 640 (620 in some circumstances)
• A debt-income ratio of up to 43% (50% in some cases) 
• No recent major negative financial events such as foreclosure, short-sale, bankruptcy or repossession 

Non-conforming conventional loans are not required to meet FHFA or Freddie Mac and Fannie Mae requirements. They might include loans for:

• Larger-than-limit amounts
• High Loan-to-value loans without private mortgage insurance
• Renovation and Construction Loan Programs
• Non-warrantable condos

Conventional loans pros and cons:

• Pros
  • Can be used for primary, secondary, or investment properties
  • Overall borrowing costs tend to be among the lowest in mortgage loans
  • Down payments can be as low as 3%
  • Sellers can contribute to closing costs
• Cons
  • Require a minimum credit score of 620
  • Require a higher down payment than some other mortgage loan options
  • Require Private Mortgage Insurance (PMI) until your equity reaches 20% of the sale price
  • Lots of documentation required to verify assets, liabilities, employment, credit and more

Jumbo Mortgage Loans

Jumbo mortgage loans are exactly what they sound like, huge loan amounts that exceed FHFA restrictions. They are a form of non-conforming conventional loans. Jumbo mortgage loans are more common in expensive markets like San Francisco, California, Hawaii, and New York City. Since jumbo loans are so big, they typically require hefty down payments. This is not always the case though, as some more favorable lenders (like IMCU) offer jumbo mortgage loans with as low as 5% down payment for qualifying parties. 

Jumbo loans pros and cons”

• Pros
  • Can borrow amounts in excess of FHFA limits
  • Interest rates tend to be comparable with other conventional mortgage loan options
• Cons
  • Can require a down payment ranging from 10 to 20 percent
  • Can require an excellent credit rating (although IMCU has options for scores as low as 680)  
  • Can require a more strict debt-to-income ratio
  • Often require demonstrable assets and cash reserves 
  • Require in-depth and tedious documentation to qualify

Government-Insured Mortgage Loans 

While you probably don’t think of the government as a lender, it does play a role in helping many Americans become homeowners. Essentially, these are loans that lenders would probably shy away from if the government didn’t insure them. In particular, there are three types of government-insured loans, each named after the backing agency. They are:

• Federal Housing Administration (FHA) loans
• U.S. Department of Agriculture (USDA) loans
• U.S. Department of Veterans Affairs (VA) loans

FHA loans help to make homeownership a possibility for borrowers who don’t have the funds for a large down payment or who have subpar credit scores. FHA mortgage loans have a limit of 96.5% financing, meaning that a down payment of 3.5% is required. In order to secure the complete 96.5% financing available, borrowers must have a minimum credit score of 580. However, if borrowers are able to put at least 10% down, credit scores of 500 are acceptable. 

One downside of FHA mortgage loans is that they require two mortgage insurance premiums which can increase your overall mortgage cost and monthly payments. It is also important to note that with FHA loans, sellers are allowed to contribute to closing costs.

USDA mortgage loans help moderate- and low-income borrowers buy property located in rural areas. In order to qualify for a USDA loan, you must buy a home in a USDA-eligible area and meet certain income limits to qualify. To qualify for a USDA loan, your household income cannot exceed 115% of median income in the area. As these limits and areas change from year to year, it’s best to head straight to the USDA loans website or consult your lending expert (like IMCU) to get the most up-to-date information. 

Some USDA loans do not require a down payment for eligible borrowers with sufficiently low household incomes. With USDA loans there are a handful of fees, including an upfront fee for 1% of the entire loan amount (which can be financed through the loan itself so it’s not exactly a 1% down payment) and an annual fee. 

VA loans offer flexible and low-interest mortgage options for members of the U.S. military, including active duty, veterans, and family members. VA loans are one of the types of mortgage loans with no down payment required. Similarly there is no mortgage insurance or a minimum credit score. Additionally, closing costs for VA mortgage loans are capped and eligible to be paid by the seller. VA loans do charge a funding fee, however, which is simply a percentage of the loan amount. This fee can either be paid upfront at closing, or rolled into the cost of the loan along with other common closing costs. 

One potential downside to VA loans is the VA appraisal. Unlike home appraisals or inspections that can be a part of conventional home buying, VA appraisers impose minimum property requirements. This can simply make the home buying process a little more tedious by adding another potential roadblock.

In general, government-insured mortgage loans are a great option for borrowers. However, as with any mortgage loan, there are some pros and cons. 

• Pros
  • Provide a path to financing for individuals who cannot qualify for a conventional loan
  • Offer more relaxed credit requirements
  • Don’t require large down payments
  • Are available to first-time buyers as well as repeat buyers
• Cons
  • Some require mandatory mortgage insurance which cannot be canceled unless the loan is refinanced as a conventional mortgage
  • Loan limits tend to be lower than conventional mortgages in most areas which can limit home inventory and availability
  • The loan must be for the primary residence of the borrower, although multi-unit buildings may be eligible in some cases
  • Could have high overall borrowing costs
  • Require more documentation and time
  • Some sellers may be wary of accepting an offer with a government-backed loan

Fixed-Rate Mortgage Loans

A fixed-rate mortgage loan maintains the same interest rate over the life of the loan. That means the borrower’s monthly mortgage payment doesn’t change (at least the principal and interest). Typically speaking, fixed-rate loans come in terms of 15 or 30 years. Some lenders will offer more flexible terms though, ranging anywhere from 8-30 years. At IMCU for example, we offer fixed-rate conforming loans in terms of 10, 15, 20, or 30 years. 

• Pros
  • Predictable monthly payment for the life of the loan
  • Long-term budget planning

• Cons
  • Likely to pay more interest with a longer-term loan 
  • Generally higher interest rates than adjustable-rate mortgages (which we’ll explore next)

Adjustable-Rate Mortgage Loans

In contrast to the stability and certainty of a fixed-rate mortgage loan, adjustable-rate mortgages (ARM) have fluctuating interest rates. Rates can go up or down depending on market conditions. Many ARM loans have a fixed interest rate for the first few years before the loan changes to a variable interest rate for the remainder of the term. 

For example, at IMCU, we offer ARM mortgage loans with fixed periods of 3 to 10 years. After the initial loan period, the interest fluctuates depending on the ARM product from every 6 months to every 5 years until the loan is completely repaid. Most Conforming, non-conforming and jumbo loans are eligible for either fixed-rate or adjustable-rate loan structures.

Mortgage Loan FAQs

Now that we have addressed the five common types of mortgage loans, let’s use that information to answer some frequently asked questions.

What Type of Loan is Best for Buying a Home?

There is no blanket answer to this question. The best type of loan is whichever one is best for your situation. In other words, certain mortgage loans are better-suited for different individuals and circumstances. For example, your goal is to minimize your down payment, a government-insured loan may be a better option if you can qualify for one. If you are wanting to get a million dollar loan, then you will have to get a jumbo mortgage. The main takeaway is there are all sorts of mortgage loan types available and each one has its own advantages and disadvantages. To make sure you understand what is best for you, it is important to work with a lending expert like our representatives at IMCU. We can help you understand all of your options. 

What Is the Average Mortgage Loan for a House?

According to CNBC, the average mortgage loan amount in the U.S. as of early 2022 was a record-high $453,000. This translates to an average mortgage payment of $2,064 for a 30-year fixed-rate loan and $3,059 on a 15-year fixed mortgage according to business insider. Per the same report, Indiana’s median monthly home payment is $1,146. 

 Which Loan Is Best for First-Time Home Buyers?

There are many different types of mortgage loans for first-time buyers. But just like other buyers, the best type of mortgage loan for first-time home buyers will vary from one borrower to the next. For example, if you are looking for first-time home buyer loans with zero down, the best loan might be a government-insured option. If you have saved up enough money to contribute a sizeable down payment, then you might consider a conventional mortgage loan option. 

These are just a few of the more common questions prospective homeowners have about mortgages. Of course, there is one more big looming question that we haven’t addressed yet, and that is which lender is the best. So let’s take a look at that next. 

Who Is the Top Mortgage Lender? Indiana Members Credit Union!

At IMCU, we make a strong case for the title of top lender. But don’t just take our word for it. Instead find out exactly what criteria we believe make us the best mortgage lender for you. 

1. Look at the numbers: First and foremost you should compare interest rates and loan specifications. At IMCU we have competitive rates and tend to actually offer better financing options than banks and other traditional lenders. 
2. Assess their options: While you don’t have to know exactly what kind of loan you are looking for, be sure to check out what options the lender offers. If they don’t offer a range of mortgage loans, they may try to coerce you into picking an option they do offer that isn’t actually the best fit for you. At IMCU you never have to worry about that. We offer a wide variety of mortgage loans from conventional to government-backed with both fixed and adjustable rate options. With IMCU we help keep it simple by focusing on you.  
3. They should be knowledgeable: The best lenders should act as an expert guide for you. Whether you want to know how to get a loan for a house with low income or are looking for the best loans for first-time home buyers with no down payment the best mortgage lenders should be able to provide insight, information, and advice throughout the whole process. At IMCU that’s exactly what you get. 
4. Community and client focused: The best companies create wins for their clients and their communities. At IMCU we take that to heart. Aside from striving to offer top-tier service to our clients in a simple and enjoyable way, we put our money where our mouth is. Since 2010, the Indiana Members Foundation has been acting as a positive influence in the IMCU communities. We provide all the necessities for school children to succeed in their education, ranging from backpacks to books, uniforms, scholarships, and more. To learn more about all the ways we create value in our community and for our clients head over to our website.  
5. It feels easy: The best lender will help you every step of the way and make the process as easy as possible. Whether it’s tools like our mortgage loan calculator, the ease of getting a quote, or our commitment to customer service, with IMCU you can get pre-approved, refinance, find special rates, and apply for financing with ease.