A purchase mortgage is what homebuyers use to finance the purchase of a new home. Whereas, a refinance mortgage is what borrowers who already own a home use to replace their current mortgage, usually with the goal of achieving a better interest rate, term, or cash-out.

The Different Types

To finance your home purchase, you can select a mortgage not backed by a government agency or one backed by a government agency. Mortgages not backed by the government are referred to as conventional loans. This is the most common type of loan offered by mortgage lenders. Mortgages backed by the government will be Federal Housing Administration (FHA) loans, Veterans Administration (VA) loans, or other mortgages such as those backed by the United States Department of Agriculture (USDA).

Reverse for Purchase (also called HECM for Purchase)

Although reverse mortgages are most commonly associated with providing older Americans both the cash and cash flow they need to age in their homes¹ with financial security, seniors can also use a reverse mortgage to purchase a new home that may be easier to maintain, closer to family and friends, and the services and amenities they value most. 

^{¹Borrowers could be subject to foreclosure for reasons including failure to maintain the property or to pay taxes and insurance.}

Whether using a reverse mortgage to live financially secure in your current home or to purchase and live in a new home that better fits your lifestyle and budget, the eligibility standards are the same.

You must be at least 62 or older (a non-borrowing spouse may be younger) and live in the home as your primary residence. Although the HECM for Purchase requires no monthly mortgage payments, and you don't have to repay what you borrow until you leave the home or do not comply with the loan terms you are still responsible for maintaining the home and paying all property taxes and homeowners insurance, as you would with a traditional mortgage.

To complete a Reverse for Purchase, you provide the down payment, using proceeds from the sale of your previous home or other savings and assets, and you borrow the remainder of funds provided by a reverse mortgage. The biggest advantage of financing your new home purchase this way is monthly mortgage payments are optional, giving you greater control over your cash flow. You are still responsible, however, for home maintenance and payment of your property taxes and homeowners insurance. 

A Reverse for Purchase also offers you the flexibility of expanding your property search criteria to homes in your preferred areas or those with more of the amenities and upgrades you want in your next residence.

Conventional Loans

• Down payments as low as 3%
• Not insured by the government
• Private Mortgage Insurance (PMI) may be required if less than 20% down payment
• Higher credit scores can result in a lower interest rate
• Less restrictive appraisal and property requirements than government-insured FHA, VA, or USDA loans
• Term lengths can vary between 10 and 30 years

Because eligibility for a conventional loan may be tougher than for a government-backed loan, both you and your lender may need to work closely together to find the right loan for your situation.

Be prepared to answer these lender questions, and, of course, be prepared at some point to document them. Your answers will help guide your lender in searching for the appropriate type of loan for your circumstances.

As your lender better understands your situation, they may be aware and able to recommend local, state, and federal programs that can offer mortgage assistance.

Lender questions to anticipate:

• Are you working?
• What’s your current income?
• What’s your credit like?
• What kind of down payment can you come in with?
• What’s your debt load or debt-to-income (DTI) ratio?
• What kinds of savings and assets do you have?
• What kind of property are you thinking of buying?

Jumbo Loans

A jumbo loan is a mortgage that exceeds or doesn’t conform with lending limits set by the Federal Housing Finance Agency (FHFA). This type of loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac, two large publicly traded corporations (agencies) formed by Congress to purchase the conventional loans that lenders make. Because there is less of a secondary market for these loans, credit standards tend to be stricter than for conventional or conforming mortgages. 

Features

• Loan amounts that can be many times larger than those for conventional mortgages
• More appropriate for high-income earners
• Interest rates often on par with conventional mortgages
• Typically more rigorous credit requirements than those for a conventional loan
• Typically lower debt-to-income ratios required compared with conventional loans

Government-backed Loans

FHA Loans

FHA loans could be easier to be eligible for than conventional loans because they are insured by the Federal Housing Administration, which conventional mortgages are not. It can be a good entry loan into the housing market if you can only come up with a small down payment.

Features

• 3.5% down payment required
• Insured by the FHA
• May be eligible with a lower credit score than conventional loan requires
• Upfront and ongoing mortgage insurance premiums may apply

Veterans Affairs (VA) Loans

A VA loan is a mortgage guaranteed by the United States Department of Veterans Affairs and available only to active service members, veterans, and eligible surviving spouses. Unlike conventional loans, VA loans require no down payment to purchase or refinance a home.

Features

• No down payment required
• No private insurance required
• Less than perfect credit often accepted
• Reduced closing costs
• Issued by private lenders
• Often offers the possibility of better terms because it’s backed by U.S. government
• Certificate of Eligibility required

Fixed Rate v. Adjustable Rate

Whether your loan is government-backed or not, you should have the choice of selecting a fixed- or adjustable-rate loan. The difference between a fixed-rate and an adjustable-rate mortgage (ARM) is that, for fixed rates the interest rate is set when you take out the loan and will not change. With an adjustable-rate mortgage, the interest rate may go up or down. 

Many ARMs will start at a lower interest rate than fixed-rate mortgages. This initial rate may stay the same for months, one year, or a few years. When this introductory period is over, your interest rate will change, and the amount of your payment is likely to rise. 

Part of the interest rate you pay will be tied to a broader measure of interest rates, called an index. Your payment goes up when this index of interest rates increases. When interest rates decline, sometimes your payment may go down, but that is not true for all ARMs. Some ARMs set a cap on how high your interest rate can go. Some ARMs also limit how low your interest rate can go.

Know how your ARM adjusts. Before taking out an adjustable rate mortgage, find out:

• How high your interest rate and monthly payments can go with each adjustment 
• How frequently your interest rate will adjust
• How soon your payment could go up
• If there is a cap on how high your interest rate could go
• If there is a limit on how low your interest rate could go
• If you will still be able to afford the loan if the rate and payment go up to the maximums allowed under the loan contract