Fixed-rate. ARM. Conventional. FHA. You have a lot of options when it comes to choosing a home loan in Washington State. But which type of mortgage loan is right for you? This tutorial walks you through the different types of home loans available in Washington State, and explains the key features of each one.
Types of Home Loans in Washington State
Home buyers often feel overwhelmed by the many choices they have to make regarding their mortgage loans. Here’s the good news. When it comes to the different types of home loans, most of those choices can be boiled down to two questions:
- Do you want a government-insured or guaranteed mortgage loan, or one that is not backed by the government?
- Do you want a fixed or adjustable mortgage rate?
Answering these questions will narrow the field and make it easier to choose the right type of loan. So let’s look at these options in more detail.
Government Loans (FHA and VA) vs. Conventional
There are three main types of government-backed mortgage loans available in Washington State — FHA, VA and USDA. Here’s what you should know about them.
An FHA loan is provided by a mortgage lender but is insured by the federal government. This government insurance makes them unique from conventional or “regular” home loans. There are two primary advantages to this program: (1) borrowers can make a down payment as low as 3.5%, and (2) the qualification criteria are generally less stringent compared to a conventional mortgage. Here’s an overview of Washington State FHA requirements.
The VA loan program is available to military service members and their families. If you’re a military member in Washington State, it’s hard to beat this type of loan. This programs allows eligible borrowers to purchase a home with no money down, and sometimes without mortgage insurance. Read our related article about VA loan limits in Washington State.
USDA home loans are available to residents of rural areas who meet certain income guidelines. They are also referred to as Rural Development (RD) loans. This program is primarily intended for borrowers with low to moderate incomes. To learn more about this type of mortgage, visit USDA.gov.
A conventional loan is one that is not insured or guaranteed by the federal government. This distinguishes it from the three types of Washington State home loans above (FHA, VA and USDA). This type of mortgage can have either a fixed or an adjustable rate of interest, as we will discuss below.
Fixed vs. Adjustable Mortgage Rates
When selecting a type of home loan in Washington State, you’ll also be able to choose between a fixed and adjustable mortgage rate.
A fixed-rate mortgage (FRM) carries the same interest rate for the entire term or “life” of the loan. Predictability and stability are the primary advantages with this type of loan. Because the rate stays the same, the monthly payments will remain fixed as well. Fixed-rate mortgage loans are available in different lengths, with 15-year and 30-year options being the most common. The 30-year FRM is by far the most popular type of home loan in Washington State.
An adjustable-rate mortgage (ARM) has a rate that can change over time. The rate usually adjusts annually in relation to a certain index, such as the London Interbank Offered Rate (LIBOR). Most ARM loans today are “hybrids” that start off with a fixed rate for an initial period of time, usually 3, 5 or 7 years. During this initial phase, the rate does not change. After that phase, however, the rate will begin to change at a predetermined interval, usually once per year. The benefit to using an ARM is that you could secure a lower rate for the first few years, when compared to a fixed-rate mortgage.
Jumbo vs. Conforming
Size is another important consideration when choosing a type of home loan in Washington State. All loan programs have limits associated with them. When you exceed these limits, you end up in “jumbo” mortgage territory, where you might encounter stricter eligibility requirements.
Here’s the difference between jumbo and conforming loans:
A conforming loan is one that meets the guidelines set forth by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that buy and sell home loans. A conforming loan is one that meets the size restrictions used by the two GSEs. The single-family conforming loan limit for most most counties in Washington State is $417,000. In the Seattle metro metro area it is set at $540,500 due to the higher home prices in the area. Here’s a list of limits for all Washington counties.
A jumbo mortgage loan is one that exceeds the conforming limits mentioned above. Jumbo mortgage products often require larger down payments and higher credit scores, due to the higher level of risk they bring.