Mortgage Guide
We recommend speaking with a local lender before making any decisions. Working with a trusted lender is key to having a manageable home-buying transaction. Even if you’re not sure you’re ready, you can work with a lender to find out what you can be doing to prepare. Any member of our team can provide you with trusted lender recommendations!
Common Types of Mortgage Loans:
Conventional Loans: Conventional loans have 2 forms; Conforming and Non-Conforming
Conforming Loan: This loan conforms (hence the name) to the standards set by the Federal Housing Finance Agency (FHFA) regarding debt, loan-size, and credit. As of 2023, the conforming loan limits are $726,200 in most areas.
Non-Conforming Loan: These loans are for borrowers looking to buy a home that is outside of the conforming loan financing limits or also for those who have challenging/unusual credit reports.
Pros:
Overall buying costs can be lower than other mortgages types, even during times when the interest rates are increased.
You may have the ability to cancel the Private Mortgage Insurance (PMI) once you have equity in the house that equals 20%. You may also refinance your loan to remove it.
May be eligible to make a loan down payment as little as 3%, if they are backed by Fannie Mae or Freddie Mac.
Cons:
Often, a FICO score of at least 620 is required.
Your Debt-to-Income (DTI) ratio must be more than 43%. Occasionally, it can be 50%.
More than likely, if your down payment is less than 20%, you will have to pay for PMI, which adds to your monthly payment.
Jumbo Loan:
A Jumbo Loan is for buyers who are looking at homes outside of the FHFA borrowing limits. This loan is most common in high-cost areas.
Pro’s:
The interest rates on jumbo loans are often competitive with other conventional loans.
Possibly the only way for borrowers to buy a home in an area with very high home values.
Con’s
Down payment requirements tend to fall between 10-20%.
Usually, a 700+ FICO credit score is required.
Your DTI ratio should not be above 45%.
More in-depth documentation is required to qualify, such as proof that you have significant assets in cash or savings accounts.
Government-Insured Loans:
FHA Loan - These home loans have highly competitive interest rates along with being more accommodating to buyers who are looking to borrow with a lower down payment and a challenged credit history.
USDA Loan - This is a loan option that assists lower-income buyers purchase a home in rural areas. Those areas must be USDA-eligible. Some of these loans do not require a down payment, however, there are some extra fees such as an annual fee and an up-front fee of 1% (the up-front fee can typically be financed along with the loan).
VA Loan - VA loans offer flexible and low-interest mortgages exclusively for active-duty and veteran members of the U.S. military, along with their families. There’s not a minimum down payment, mortgage insurance or credit score requirement. Closing costs are typically capped. VA loans charge a funding fee, which is a percentage of the loan amount. The funding fee can be paid upfront or rolled into the cost of the loan.
Barry from Cazle Mortgage explains FHA loans.
Fixed-Rate Mortgage: This is a loan that maintains the same interest rate for the life of your loan.
Pro’s:
Your monthly payments remain the same for the entirety of your loan.
Con’s:
If the interest rates drop, you will have to apply for refinancing to get a lower interest rate.
Interest rates are typically higher for FRM’s compared to other loans, such as an Adjustable-Rate Mortgage.
Adjustable-Rate Mortgage (ARM): These are loans where your interest rate fluctuates according to the market. In most cases, these loans have a fixed-rate for a few years before the interest rate changes. If you are considering this loan, make sure to read the fine print for the most your interest rate could increase.
Pro’s:
Possible low interest rates in the first few years
Con’s:
Monthly payments may become unmanageable depending on the market, so a loan default could be possible.
If home values decline, it would make refinancing or selling more difficult.