Which of These 6 Different Types Of Mortgage Loans Are Right for You?

Buying a home is a key milestone for many Americans, but the average American can’t buy a home without taking out a mortgage. When it comes to choosing the right mortgage loan, there are many options to choose from.

The doctor mortgage program is a popular choice for physicians and dentists, but what about other common mortgage options? Just because you qualify for the doctor mortgage program, qualifying doesn’t mean it’s the right product for you and your current situation.  

Here are the 6 main mortgage loan types (besides the doctor mortgage program):

• Conventional Loans
• Construction/Renovation Loans
• Jumbo Loans
• Federal Housing Administration (FHA) Loans
• First-Time Home Buyer Loans
• Veterans Affairs (VA) Loans

Let's dive into the different loan types and actionable ways you can start saving for a downpayment on your home!

Listen to our podcast here on "Real Estate Loans and Other Lending Options for Physicians," or keep reading below:

What Are Your Mortgage Loan Options as Physician or Dentist?

1.       Construction and Renovation Loan 

Construction and renovation loans are used for building new residences or refurbishing your current ones. Construction loans are especially helpful if you only have a patch of land and want to build something from scratch. Renovation loans are appropriate if you love your existing house, but want to update your kitchen, bathroom, or other space in your home.

Pros:

• • • Consolidation - You can consolidate both mortgage and construction costs into one payment, which can help you stay organized. By doing this, you can also save on interest costs since you won’t make interest payments on multiple loans.

• • • Interest-Only Payments During Construction - You can make interest-only payments during the construction phase. This makes this option one of the more flexible types of mortgage loans.

Cons:

• • • Higher Costs - There could be higher interest rates and closing costs associated with this loan type. (The closing costs are based on the new value of your mortgage and renovation expenses.)

• • • Longer Approval Times - There also could be a longer approval process with construction and renovation loans. Mortgages aren’t easy to obtain and the approval process for this loan is much longer as there are different parties involved like contractors and appraisers.

2.       Jumbo Loan

Jumbo loans are useful if you’re looking to finance a property that is higher than the conforming limit of $510,400 for 2020.  Conforming limits refer to the amounts being financed, not the home’s value. These loans can also help you buy a property in expensive areas like Hawaii and parts of California, where the conforming limit is $765,600.

Pros:

• • • Great Option for Expensive Properties  - This program is one of the better different types of mortgage loans if you want to buy an expensive property.

• • • Flexibility - Jumbo loans are more flexible as you can choose various terms like 15 or 30 year and fixed or variable jumbo loans.

Cons:

• • • Higher Closing Costs - One factor behind these closing costs is that lenders might require multiple rounds of appraisals. After all, they don’t want to lend you $900,000 for a home that might be worth $850,000.

• • • Stricter Credit Requirements - Many lenders will want to see a credit score of a least 660 before considering you for a jumbo loan. This is much higher than other programs like FHA loans.

3.   Conventional

Conventional mortgages are just that: conventional. These traditional loans can be a great choice if you’re looking for flexibility. For example, you can choose between fixed, variable, or hybrid interest rate loans.

Unlike other choices on this list, most conventional loans aren’t offered or secured by a government entity. Instead, they’re offered by private parties like banks, credit unions, and mortgage companies. 

Yet, some conventional mortgages can be backed by Freddie Mac and Fannie Mae — two government entities that are meant to help more Americans become homeowners.

Pros:

• • • Flexibility - With conventional loans, you can choose between fixed, variable, and hybrid interest rates. A 5/1 ARM means that the first 5 years of the loan will have a fixed interest rate with the remaining years having a variable rate.

• • • Inflation Hedge - Having a fixed rate will ensure that your rate will be fixed and won’t increase your housing costs.

Cons:

• • • Higher Downpayment - A higher down payment is required. Most lenders require at least 20% and those that might accept slightly less than this amount will assess PMI or Private Mortgage Insurance. PMI protects the lender and this expense can add hundreds of dollars to your monthly payment.

• • • Higher Closing Costs and Rates - Unlike government programs such as the FHA loan, the rates and closing charges can be much higher and vary based on the lender.

4.      Veterans Affairs (VA)

VA loans have many generous benefits, including not requiring a down payment, and are meant for military veterans and their spouses. You can qualify for a VA loan if you meet one of the following conditions that apply if you’ve served in any military branch: 

• 90 consecutive days of active service during wartime.
• 181 days of active service during peacetime.
• You’ve been in the National Guard or Reserves for more than 6 years.
• Your spouse died or was disabled during his or her military service.

Pros:

• • • No Downpayment - VA loans are for military veterans and one of the biggest benefits of a VA loan is that you can buy a home without a down payment! However, be sure that you can afford the mortgage payments before doing this.

• • • No Mortgage Insurance - Usually, lenders charge mortgage insurance or PMI when a borrower can’t put down at least a 20% down payment. VA loans bypass this unnecessary expense.

Cons:

• • • Only for Primary Residence - Can only be used for primary residences. If you want to purchase an investment property or a second residence, consider different types of mortgage loans.

• • • Less Home Equity - It might seem like a great deal to buy a property without a down payment, but this leads to having minimal or no home equity. This can be a huge problem if you need to sell the home during a declining market.

5.       Federal Housing Administration (FHA)

FHA loans can be a great option if you have a low to moderate income, since these loans have a lower down payment and credit score requirements than other types of mortgages. They’re insured by the Federal Housing Administration and are issued by an FHA approved lender.

Pros:

• • • Low Downpayment - FHA loans can let you put as little as 3.5% down on a property. Unlike VA loans, these are open to first time home buyers of various backgrounds.
    • Can Qualify with Low Credit  - You can also qualify with a credit score as low as 580, which is much lower than the standard 650 score required by most lenders.

• • • No Income Limits - You can qualify for this loan if you have a high income and mediocre credit. Other loan types like Fannie Mae HomeReady® program aren’t available if you make more than 80% of your region’s median income.

Cons:

• • • Only for Primary Residence - Just like the VA loan, this option only allows you to use this loan on your primary residence. If you are thinking about purchasing an investment property, try looking into different types of mortgage loans!

• • • Lifetime Mortgage Insurance - While you can buy a home with a low down payment via this program, you’ll always be stuck with mortgage insurance (PMI) for the entire life of the loan. One method to avoid this is to refinance into a completely different loan type.

6.     First-Time Home Buyer Loan

As the name implies, this type of mortgage is great if you’re a first time home buyer. The main difference between this loan and the FHA loan is that this type requires you to be a first-time home buyer. Therefore, it has lower credit and down payment standards. Some states, including Texas, offer grants to new homebuyers who might be struggling to save a sizable downpayment.

Pros:

• • Grants - The grants from this type of loan will assist with the costs of purchasing your first home, including down payments and closing costs. The HomePath Ready Buyer is offered by Fannie Mae and can pay up to 3% of the mortgage’s closing costs.

• • Interest Subsidies - Some organizations help lower-income borrowers obtain a lower rate, resulting in lower monthly payments.

Cons:

• • Income Limits - Unlike the FHA loans, first time home buyer loans cap the dollar amount of property that you can buy.

• • Only for a Primary Residence - Like FHA and VA loans, this type of mortgage is only meant for a primary residence, which makes it a poor choice for real estate investors. Banks also have stipulations on what type of home will qualify for this loan. For example, some banks won’t offer a First-time home buyer loan for a property consider a condo.

Now that we talked about your different mortgage options, let's see how these options compare to the Physician Mortgage Loan. 

How Does the Doctor Mortgage Loan Stack Up Against Your Other Mortgage Options?

Physician mortgages are designed for medical doctors, who usually have high debt to income ratios. These loans help physicians and dentists become homeowners since they have lower down payment requirements and can cater to residents as well as new graduates. These professionals can qualify for this type of financing as they just need to have a medical degree and defined start date for their job.

Pros:

• • • Low Downpayment -  This is one of the best types of mortgage loans if you have limited funds for a down payment as you can put as little as 0-10% down without PMI. 

• • • Quick Closing Process - If you have a contract for future employment, then this will be sufficient. Other different types of mortgage loans require you to be currently working.

Cons:

• • • Stricter Credit Requirements - To obtain a physician mortgage, you must have a credit score of around 700. Some lenders can go as low as 680, while others might require a 720 FICO score.

• • • High Fees - The fees and rates are higher than a standard loan. Banks tack on these extra costs since this mortgage program allows you to have a low down payment without PMI.

All in all, the best type of mortgage loan for your next home purchase varies heavily on your situation. Not sure which one best suits your situation? Connect with one of our financial professionals to start planning out your home purchase plan from a financial perspective!

How To Save For A Home Downpayment

Saving for a downpayment may seem burdensome without a financial plan. Here are some actionable ways you can start saving for a downpayment on your next home.

1. Set A Savings Goal & Stick To A Budget

Setting and sticking to a budget is one of the most important ways to save for a downpayment. Some budgeting tips include:

• • Start by calculating your net worth with this guide. Then use a software like Mint.com to track income and expenses.

• • Set aside a portion of your pay to be automatically transferred to savings. This is referred to as “paying yourself first.”

• • Allocate your down payment funds to a high yield savings account. This will help you accumulate more money compared to a standard savings account paying 0.01% interest.

• • Implement minor tweaks to reduce spending on variable costs (i.e eating out) by cooking more meals at home. Then, you might apply this difference by increasing your savings rate by adding half or one percent more to your savings.

2.      Gifts

One unique way to save for a downpayment is to receive a gift from a blood relative, distant family member, charity, or even employer. Some loan programs like the conventional mortgage require that the gift must be from a blood relative. Others like the FHA program have looser requirements and allow nieces, nephews, cousins, close friends, and charities to be donors. 

You must also provide your lender paperwork, including the gift letter, which documents that you’ve received the gift and that it won’t need to be repaid. This letter also describes your relationship with the person or entity giving you the funds (i.e the donor).

3.       Intrafamily Loans

Gifts can be a good way to save for a downpayment. But, these gifts can cause estate planning issues like triggering the gift tax. Each person can give up to $15,000 per year gift tax-free and amounts above that might result in additional taxes. Always consult a tax professional or financial planner before making or receiving a large sum of money.

Intrafamily loans let family members loan you a sum of money at very low-interest rates called AFR rates. These loans will help you pay less than what you would with a traditional mortgage. They also help the donor avoid gift tax consequences since the sum would be considered a loan. Consult this chart for current AFR rates.

Don't Become "House Poor" as a High-Income Earner

Many high-income earners fall victim to big loans banks are willing to offer them. Then, they end up buying the huge dream home, resulting in an expensive housing payment. This is known as being house poor. Remember that housing costs include other items besides a mortgage like:

• Property taxes
• Utilities
• Homeowners insurance
• HOA fees
• Repairs and maintenance
• Furnishing your home

Always consider these costs and make sure that your total housing payment won’t break your budget. You should have enough money left over to save, invest, and even pay back other types of debts like student loans.

Are You Prepared to Choose a Mortgage Loan?

Buying and/or renovating a home isn’t a decision to be taken lightly as these will likely be your largest purchases. If you’re like most people, then you need financing (i.e a mortgage) to buy a property. 

A home mortgage is usually considered “good debt,” but it’s always important to understand how much house you can actually afford, while funding the rest of your lifestyle. Don’t over-leverage yourself in an illiquid asset and be sure to have emergency (cash!) savings on hand at all times. If you’re planning to buy a house, prioritize your down payment savings goal over unnecessary, spontaneous purchases that might cross your mind.

If you are still confused about what home loan option is best for you, let's talk! Schedule a complimentary discovery call with one of our financial professionals to start the conversation. 

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