Different Loan Types Explained

Purchasing your first home can be difficult to navigate, especially if you are new to the real estate world. All of the brand new lingo getting thrown at you can be super overwhelming, so if you’re feeling confused, you’re not alone! However, the good news is that even though this process may seem complicated, it’s truly very simple! Unfortunately, if you don’t have cash outright to buy an entire house (most people don’t, especially for their first one), you have to borrow the funds from a bank with interest. Your real estate agent may recommend a lender, or you can pick your own if you like to do your own research. Either way, you should expect the same process.

What To Expect When Talking to a Loan Officer

The first question your personal or suggested loan officer may ask: “What type of loan do you want?”

Your real estate agent, loan officer, or lender may suggest one that they recommend. Or, they may ask more questions about your situation to determine the right choice. They might throw out words like conventional, 10-31 Exchange, investment, FHA, fixed rate, adjustable rate, and more. If you’re feeling confused, let’s help break it down to terms that actually make sense.

Types Of Loans

  • Conventional: This popular type of home loan isn’t insured or guaranteed by any government entity. This separates it from the following types of loans.
  • FHA: The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), a federal government entity. Fortunately, these loans are available to all types of borrowers, contrary to popular belief. Check out our guide on FHA loans for more details on this type of loan.
  • VA: The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it’s a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever. Thank you for your service!
  • USDA: The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” However, the requirements vary by county. We recommend meeting with your local lender for more information on a USDA Loan.

Sub Types

  • Fixed-rate: Fixed-Rate loans have the same interest rate for the entire repayment term. This means you can expect your mortgage rate to stay the same forever. Well, at least until your home is paid off completely. It’ll never change, making budgeting easier. Simple!
  • Adjustable-rate: These types of loans will adjust every once in a while, usually every year after an initial fixed time period. This is also known as a hybrid loan, since there is a fixed rate before switching to an adjustable rate. For example, a 5/1 ARM loan has a fixed rate for the first five years. After this, it will adjust every one year, or annually.

Conclusion

A great real estate agent and loan officer will make the process of buying a house simple. They can explain the different types of loans and help you find the right one for you. However, our experts here at CDA Real Estate Investment recommend researching loan types on your own as well. This helps guarantee that you choose the perfect loan type for you.