Unless you have the means to pay in cash, you’ll need to get a loan when you need to buy a home. It can be confusing, but it’s important to understand that there are many different types of mortgages a homebuyer can choose from. Thankfully, we’re here to help.
The first thing to note is that all mortgages can be broken down into two categories: conforming loans or non-conforming loans.
Conforming loans have well-defined guidelines set by the Federal Housing Finance Agency (FHFA), so there’s less variation in who qualifies for a conforming loan. The biggest difference between conforming and non-conforming loans is that a lender can sell conforming loans to Fannie Mae or Freddie Mac, so they’re less risky for the lender.
A non-conforming loan has less strict standards than a conforming loan and is available to a wider range of potential buyers. These loans let you borrow more money with a lower credit score, get a loan with no money down or borrow money if you have negative items on your credit score.
Conventional mortgages are the most common type of mortgage; however, they do have stricter regulations regarding credit score and debt-to-income (DTI) ratio. Conventional mortgages allow buyers to put down as little as 3 percent. These are a good option for borrowers who don’t qualify for government-backed loans or who want to take advantage of low interest rates with a larger down payment.
While payment may fluctuate due to tax or insurance rates, a fixed-rate mortgage carries the same interest rate throughout the loan period. These home loans are ideal for folks who are looking to buy their forever home and who want to know how much they’ll pay each month.
Adjustable-rate mortgages are 30-year loans that change depending on how market rates move. You’ll first have an introductory fixed rate for five, seven or 10 years. After this period ends, your interest rate will go up or down, depending on the index’s market rates. This loan might be right for you if you’re a first-time buyer who doesn’t expect to live in the house for the loan’s full term.
As the name suggests, government-backed home loans are insured by a government body. These loans are great for buyers who don’t qualify for traditional loans, but borrowers must meet specific criteria. A good example is a VA loan that’s provided through the United States Department of Veterans Affairs (VA). VA loans don’t need any down payment and have very low interest rates; however, borrowers must meet certain service requirements.
If you want a high-value property, your best bet is often a jumbo loan. These loan interest rates are like conforming mortgages, but they are more difficult to qualify for. Borrowers must have high credit scores and low DTIs to qualify.
How much home can you afford?
Figuring out how much you can afford to spend on a home doesn’t have to be a guessing game. Talk to our professionals at Carpenter Real Estate about the different types of mortgages and loans available, or use our online calculator to see what your monthly mortgage payment would be.