Home buyers have several options when purchasing a property. Here, we’re exploring the different mortgage loan types, along with real estate property definitions to help buyers make the most informed decisions.
Mortgage Loan Types
Types of Property
Mortgage Loan Types
Buyers have several options when obtaining a home loan. The most common mortgage loan types are:
Conventional
A conventional mortgage is any mortgage loan that is not insured or guaranteed by the Federal government. Conventional mortgage loans can be fixed rate or adjustable rate (see ARM below). A conventional mortgage will require you to make a higher down payment and to have a higher credit score than a government-insured loan.
Generally, a 20% down payment is required by the lender, as well as a credit score of 740 or higher. If the loan-to-value exceeds 80 percent, the lender will require you to obtain private mortgage insurance (PMI). This additional monthly payment will expire only when the loan-to-value ratio falls under 80 percent.
Conventional mortgages provide more flexibility than government-insured loans because they may be retained and serviced by the original lender, meaning banks can set their own lending guidelines. Conventional loans tend to fare better in multi-bid situations than government-backed loans.
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FHA
The Federal Housing Administration (FHA), part of the Department of Housing and Urban Development, insures this type of mortgage loan. With an FHA loan, you can expect a lower down payment requirement, lower closing costs, and easier credit qualifying. FHA loans are intended to help first-time homebuyers access homeownership without worrying about huge down payments.
FHA does not actually lend you the money. Rather, it reimburses the lender in case you default on the loan. This reduces the lenders’ risk, which makes them more willing to loan money, and keeps your borrowing costs low. This loan is a good option for first-time homebuyers and for anyone who might have trouble qualifying or meeting down payment requirements for a conventional loan. However, in a competitive housing market, sellers may see a buyer with an FHA loan as higher risk and less desirable.
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VA
This mortgage loan type is guaranteed by the Veteran’s Administration and has terms and requirements similar to an FHA loan. It is available to military service members, veterans, and eligible surviving spouses (eligibility requirements apply). VA home mortgages are provided by private lenders like banks, credit unions, and mortgage companies. The VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms.
The VA currently offers a no-down payment home loan program. The VA loan does not require the borrower to pay private mortgage insurance (PMI), even if the loan-to-value ratio exceeds 80 percent. That benefit alone could save the borrower thousands over the life of the loan. You must meet certain credit requirements, have sufficient income, and provide a valid Certificate of Eligibility (COE) to be eligible for this loan. Additionally, the home you purchase must be for your own personal occupancy and cannot be used as an income-producing property.
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Rehabilitation
Also known as 203(k) loans, rehabilitation loans are offered by the FHA and are designed to help people acquire and rebuild homes in economically deprived communities. The loans are intended for properties in need of rehabilitation or repair. A 203k loan finances not only the home purchase but also the rehabilitation costs necessary to repair and renovate the distressed property. The bank takes the “as is” market value of the property and adds the costs of repairs to the total mortgage amount. As soon as you close the loan, you go to work on the renovation. When the renovation is completed, you can move in.
203k loans can be fixed-rate or adjustable mortgages. These loans do require borrowers to pay an up-front mortgage insurance premium (UFMI). The UFMI is similar to PMI in that it helps protect the borrower should you walk away from the property. However, UFMI is typically more costly since 203k loans are considered higher risk.
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Jumbo Mortgage
If you want to purchase or refinance an expensive home, you may need to obtain a jumbo mortgage. This refers to a loan that is larger than the typical conventional mortgage loan size, exceeding the lending limits of the government-backed lending agencies, Freddie Mac and Fannie Mae.
Mortgage loans that meet the limits allowed by Fannie and Freddie are called conforming loans (see above). The loan limit varies based on the average home prices. As of this writing in 2022, the current maximum is $647,200. Home loans above this amount, but lower than $970,800 are considered “super conforming loans.” These super conforming loans are still jumbo loans, but they may be financed using Freddie Mac and Fannie Mae programs.
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Non-Conforming
This type of mortgage does not meet the guidelines set by Fannie Mae and Freddie Mac, and therefore your lender cannot sell them to either of those entities. Government guidelines set a maximum loan amount, define suitable properties, and state down payment and credit requirements, among other factors.
Conforming mortgages are the more traditional types of loans, such as a 15- or 30-year fixed-rate mortgage. Negative amortization mortgages, for example, would be considered nonconforming. Also, it is quite common for non-conforming loans to be used if you are buying a higher-priced property, such as a luxury primary residence, a second home, or personal investment property.
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Reverse Mortgage
A reverse mortgage is a loan for homeowners 62 years old or older. It uses your home’s equity as collateral, allowing you to convert part of your home’s equity to cash in retirement. The loan generally does not have to be repaid until the last surviving homeowner either dies or permanently moves out of the home. When that happens, your estate would have approximately six months to repay the balance of the reverse mortgage or sell your home to pay off the balance. If there is any equity remaining after the payoff, it is inherited by your estate. It’s important to know, however, that your estate is not liable if your home sells for less than the balance of the reverse mortgage.
There are no credit, income, or asset qualifications to get a reverse mortgage. However, you must have sufficient equity in your home, and there cannot be any liens or other obligations on the property.
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Sub Prime Mortgage
This type of loan is made to people with poor credit histories and credit scores usually below 600. Because of their deficient credit rating, these individuals would not be able to qualify for conventional mortgages and possibly not even for FHA or VA loans. Because subprime borrowers pose a much higher risk for lenders, subprime mortgages charge interest rates that are above the current prime lending rate.
There are several different kinds of subprime mortgages currently on the market. The most common is the ARM, or adjustable-rate mortgage. This mortgage generally starts out at a very low fixed interest rate for a few years. Then, converts to a floating rate after the initial period ends. This can cause the monthly payment to increase significantly, and often can be more than the homeowner can afford.
In a competitive sellers’ market, a sub prime mortgage is seen as largely unfavorable for sellers.
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USDA Mortgage
Through its Housing and Community Facilities Program, the U.S. Department of Agriculture provides loans and grants for housing and other facilities in rural areas. Funds may be available for single-family homes, apartments for low-income or elderly individuals, as well as for public facilities such as schools and libraries. Interest rates on these loans are generally at least 1% lower than the current market rates.
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Construction to Perm
A construction-to-permanent (also known as “construction-to-perm”) loan is what borrowers use to finance the construction of a new home. The original loan rolls into a permanent mortgage when construction is complete. The big advantage to this type of loan is that there is only one closing, which saves you two separate closing costs and incorporates both the land purchase and the construction loan into the permanent mortgage.
Interest rates during the construction phase are not fixed, but float up or down with market rates. The fixed rate applies once the permanent mortgage is implemented.
In order to qualify, you will need all of your construction information, including the builder’s license and insurance documentation. You will also need an appraisal on the blueprints as though the house was already completed. You must qualify for the permanent loan and show that you have the down payment funds on hand. An FHA loan will require you to put 3.5 percent of the total build cost down. Most conventional lenders will require at least 10 percent of the total when you take out the construction loan.
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Home Equity Line of Credit (HELOC)
This is a line of credit you can obtain as a homeowner using your home as collateral. When you apply, a maximum credit line is established, based on your equity. Then you may draw on that credit line as you with. You’ll be charged interest on a predetermined variable rate, which is usually based on the current prime rate.
When you owe a balance owing on the loan, you can choose a repayment schedule as long as you make minimum interest payments every month. The term of a HELOC can be anywhere from less than five years to more than 20. At the end of the term, you must pay your balance in full.
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Home Equity Mortgage
This is a type of loan where you use the equity in your home as collateral. People use home equity loans to finance major expenses such as home remodeling, medical bills, or college tuition. This loan creates a lien against your property and reduces your equity. A home equity loan is different from a HELOC (above) because the term is fixed rather than variable. This loan is also sometimes referred to as a second mortgage. In order to qualify, you will need a good credit score, as well as sufficient equity in your property to borrow against.
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Adjustable Rate Mortgage (ARM)
This mortgage offers an interest rate that starts lower than a conventional mortgage but adjusts periodically, usually in response to changes in the Treasury Bill rate or the prime rate. You are protected by a stated maximum rate, or ceiling, which is usually adjusted annually. Adjustable rates transfer part of the interest rate risk from the lender to you as the borrower. You could benefit if the interest rate falls, but you are at risk if the interest rate increases.
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Real Estate Property Types
Real estate properties are widely varied. Residential real estate typically includes single-family homes, townhomes, or individual condos, where only one family purchases a unit. Commercial real estate is often purchased as an investment and includes anything from multifamily properties to retail or office properties.
Single-Family
A single-family home is a detached dwelling, usually with both a front and back yard, a driveway, and an attached or detached carport or garage. Because the home is detached, meaning it shares no common walls, it offers more privacy and less bothersome noise from neighbors. Single-family homes can sometimes be expanded if the lot size is sufficient and association or city rules allow an expansion. Garages are fairly common in newer homes, and some neighborhoods may have a homeowner’s association (HOA) to manage common areas.
Single-family is generally a more expensive home type than a condo or townhome, and all the maintenance, improvements, and repair costs fall to the homeowner.
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Multi-Unit Residential
There are many varieties of multi-unit residential properties, but the most common is an apartment building. These can range in size anywhere from a two-flat building to a large structure with multiple floors and multiple apartment units on each floor. Townhouses and condos are also considered multi-family dwellings (see below).
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Condominium (Condo)
A condominium, or condo for short, is a form of homeownership in which you as a homeowner purchase an individual unit of a larger complex. These units may be new or renovated apartments or townhouses.
If you purchase a unit in a condo complex, you technically own everything from the exterior walls inward. All of the individual homeowners in your complex share the rights to most common areas, such as the elevators, hallways, pools, and clubhouses. There is a homeowner’s association (also known as a condo association), to which each owner pays dues. The association is responsible for the maintenance of the common areas and is managed by a board elected by the homeowners. In the case of major projects or needed improvements, homeowners may agree on a special assessment in addition to regular dues.
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Townhome
The term “townhome” or “townhouse” has become a bit of a catch-all term. Generally, it refers to any home that shares a building with other units, but each unit is designed to look more like a single-family home than an apartment. A townhome differs from a condo in that is has no other units above or below. Most townhouses or townhomes are multi-story structures, meaning that there are common walls on each side, but no neighbors living above or below you. Some townhomes are carriage style, meaning there is a garage on the ground level, with living areas on one or two floors above the garage. Management of a townhome complex is similar to that of a condominium, as described above.
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Vacant Land
This term refers to a lot, tract, or parcel of land that is empty, meaning there are no houses or other structures on it. Vacant land may be classified as improved or unimproved. For example, a parking lot could be classified as vacant land, but it would be improved. Some vacant land is improved by bringing in utilities, such as water, sewer, or electric power. If you own vacant land, you are liable for property taxes based on the value as assessed by your local taxing authority.
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Industrial Property
There are many types of industrial property, including factories, warehouses, heavy and light manufacturing buildings, industrial parks, and research and development complexes. Storage facilities are also considered industrial property. Some industrial properties are multi-use, including both office and manufacturing buildings. Many states require businesses to pay taxes on industrial property, although some may offer exemptions in order to attract certain kinds of businesses.
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Office Building
An office building is a type of commercial building which contains spaces mainly designed for use as offices. The primary purpose of an office building is to provide a working environment for administrative and managerial workers. An office building might be a dedicated space for one specific company, or it could be divided into sections for different companies. In either case, each company will typically have a reception area, one or more conference rooms, individual or open-plan offices, as well as common facilities such as restrooms, kitchens, and break areas.
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Hotel
A hotel provides short-term lodging, usually payable by the day or the week. Many hotels offer meals and other amenities for guests, like a pool or fitness center. Hotels often include meeting and banquet rooms, business centers, and even entertainment venues. Similar or related facilities may be called inns, motels, hostels, or bed-and-breakfasts.
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Farmland
Farmland is classified as land that is being cultivated to grow crops, livestock, or both. Farmland may be used by individuals for personal purposes or can be considered commercial, where crops and livestock are used to produce an income for the owners. Farmland is also sometimes called a ranch, estate, or plantation.
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Mobile Home
A mobile home is a structure built by a manufacturer at an industrial facility and then moved onto a lot where it becomes a permanent or semi-permanent structure. It may also be called a modular or manufactured home. These homes are single-family dwellings and are often grouped together in mobile home parks. These parks typically rent out plots of land to tenants who then place their homes on the land. Many of these parks have high standards regarding the configuration and quality of their home and the property’s external appearance. All mobile home owners must agree to these standards when renting the land.
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Recreational Property
This is generally any property that is attractive to vacationers or used for recreation or leisure activities because of its natural resources, beauty, or improvements. This type of property could be anything from a lakefront cabin to a ski chalet. Recreational property uses might include a hunting lodge, golf course, horse ranch, campground, or marina.
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