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When it comes to purchasing a home, very few people have enough cash on hand to close the deal. This is where a mortgage comes in. A mortgage is a loan used to buy real estate, and it comes in a variety of types, each suited to a certain type of buyer.
Home loans are either conforming, meaning they fall within loan limits set by the Federal Housing Finance Agency (FHFA), or nonconforming, meaning they are above those limits. For 2024, depending on geographic area, conforming loans cannot exceed $766,550.
Because nonconforming loans are considered riskier than conforming loans, they often carry more stringent underwriting requirements. Sometimes, mortgage lenders also charge a higher interest rate on a nonconforming loan.
There are two main types of rates for mortgage loans: fixed rate and adjustable rate. Rate refers to the interest rate and these two options refer to whether it stays the same or changes over the life of the loan. Most types of loans (but not all) are available with a fixed or adjustable interest rate option.
There are many mortgage options available, and it's important to carefully consider your individual financial situation and goals before choosing one. Things to consider include your credit score, income, debt-to-income ratio, and the amount of down payment you can afford as well as whether you want to purchase mortgage points to lower your interest rate. You should also shop around and compare mortgage lenders for any of the mortgage types below to find the best fit for your needs.
A fixed-rate mortgage is a type of home loan with an interest rate that remains the same for the entire term of the loan. This means that your monthly payments will remain the same, making it easier to budget and plan for the future. Fixed-rate mortgages are available in a variety of terms, such as 15, 20, or 30 years, giving you flexibility to choose a loan that meets your individual needs and goals.
Fixed-rate mortgages are generally best for those who value stability and predictability in their monthly housing costs. This includes individuals who have a steady income and want to know exactly how much they'll be paying each month for the life of the loan.
Fixed-rate mortgages are also a good choice for borrowers who plan to stay in their home for a long time, as the stability of the interest rate and monthly payments can provide peace of mind for years to come.
Fixed-rate loans are offered by a variety of lenders, including banks, credit unions, and mortgage companies. Some popular lenders include Ally, Bank of America, Chase, and Rocket Mortgage.
Adjustable-rate mortgages, or ARMs, are home loans that have interest rates that can change periodically, typically semi-annually or annually. ARMs start with a fixed interest rate for a certain period of time, such as five, seven, or 10 years. After this period, the rate can adjust up or down based on market conditions. ARMs usually have interest rate caps that control how much the rates adjust.
If you plan to sell your home or refinance your mortgage within a few years, an ARM may be a good option since you can take advantage of the lower initial interest rate during the fixed-rate period. Likewise, if your income varies from month to month or seasonally, an ARM may be a good fit since your monthly mortgage payments may be lower during periods of lower income.
If you expect interest rates to decrease in the future, an ARM may be a good option since your interest rate and monthly mortgage payments may decrease as well. If you plan to pay off your mortgage early, an ARM may be a good fit since you can take advantage of the lower initial interest rate and pay off the loan before the interest rate adjusts.
Variable-rate loans, like fixed-rate loans, are offered by a variety of lenders, including banks, credit unions, and mortgage companies. Some popular lenders include Bank of America, PenFed Credit Union, PNC Bank, Rocket Mortgage, and Wells Fargo.
Conventional loans are private, meaning they are not backed by a government agency. They can have a fixed or adjustable interest rate. Conventional loans usually require a higher credit score and a larger down payment than government-backed loans. They have a variety of term lengths, such as 15, 20, or 30 years. Additionally, conventional loans offer more flexibility when it comes to the property type and loan amount.
Conventional loans are best for borrowers with a high credit score and a substantial down payment. If you have a credit score of 680 or higher and can put down at least 20% of the purchase price, a conventional loan may be a good option for you.
Conventional loans are also a good choice if you are buying a single-family home, a townhouse, or a condominium, or if you are looking to refinance an existing mortgage. Finally, if you want to avoid paying mortgage insurance for the life of the loan, a conventional loan may be a better option than a government-backed loan.
Conventional loans are offered by a variety of lenders, including banks, credit unions, and mortgage companies. Some popular lenders include Wells Fargo, Bank of America, Quicken Loans, and Chase.
Federal Housing Administration (FHA) loans are mortgages insured by the federal government that require only a 3.5% down payment and have lower credit score requirements. FHA loans require you to pay mortgage insurance premiums, which protect the lender in case the borrower defaults on the loan. In addition, FHA loans have maximum loan limits and require purchased property to meet safety, soundness, and sanitation standards.
FHA loans are particularly well-suited for first-time homebuyers, those with less-than-perfect credit, and anyone who can’t afford a large down payment. In addition, FHA loans are often eligible for down payment assistance programs, which can help borrowers further reduce their out-of-pocket costs. For those who wish to refinance their existing mortgage, FHA refinance loans often have more lenient qualification criteria than conventional refinance loans.
FHA loans are offered by FHA-approved lenders such as banks, credit unions, and mortgage companies. Some popular lenders include Quicken Loans, Wells Fargo, and Bank of America. You can also search for FHA-approved lenders on the U.S. Department of Housing and Urban Development (HUD) website.
VA loans are home loans guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty military members, and spouses. These loans offer a range of benefits, including no down payment, no private mortgage insurance, and competitive interest rates.
VA loans are designed to help veterans and military personnel achieve homeownership and provide them with a range of financial benefits. They also may be a good option for those who want to refinance an existing mortgage or who experience financial hardship and require additional assistance.
VA loans are only available through VA-approved lenders, such as banks, credit unions, and mortgage companies. Some popular VA-approved lenders include Veterans United Home Loans, Navy Federal Credit Union, and USAA. You can also search for VA-approved lenders on the VA website.
USDA (United States Department of Agriculture) loans are government-backed fixed-rate mortgages designed to help low-to-moderate-income borrowers in rural areas purchase a home. USDA loans have flexible property requirements that allow for the financing of certain types of rural properties, including single-family homes, townhouses, and some condominiums.
USDA loans are designed to help low- to moderate-income borrowers who may not be able to qualify for other loan programs. This typically means people in rural or selected suburban areas who do not have money for a down payment and require a low-interest loan to be able to afford a home.
You must apply for a USDA loan through a USDA-approved lender. You can find a list of approved lenders on the USDA website or by contacting your local USDA office. The lender will review your financial information and determine whether you meet the eligibility criteria for a USDA loan.
High-balance loans, or conforming high-balance loans, are for home buyers in high-income areas. They exceed FHFA conforming loan limits but meet local loan limits. Unlike jumbo loans, high-balance loans are backed by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.). High-balance loans vary by county, and limits are set by FHFA.
Jumbo mortgage loans exceed the conforming loan limits set by FHFA. Jumbo loans are used to finance large, luxury homes or properties in high-cost areas where the average home value exceeds the national and local conforming loan limit. Jumbo loans often come with stricter qualification requirements and higher interest rates than conventional loans. For those who don’t qualify for a high-balance loan, a jumbo loan may be appropriate.
Reverse mortgages allow homeowners who are 62 years of age or older to convert a portion of their home's equity into cash. Unlike with a traditional mortgage, you don’t make monthly payments to the lender. Instead, the lender makes payments to you, which can be received as a lump sum, monthly payments, or a line of credit. The loan is repaid when you sell the home, move out, or pass away. The amount of money you can borrow with a reverse mortgage is based on your age, the value of the home, and current interest rates.
Construction loans are used to finance the construction of a new building or the renovation of an existing one. Unlike traditional mortgage loans, which are typically used to purchase already-built homes, construction loans provide funding for the construction process itself. This type of loan is typically short-term, with a repayment period of one year or less, and it may require you to make interest-only payments during the construction phase. Once the construction is complete, you can either pay off the loan in full or convert it into a traditional mortgage loan.
Interest-only mortgages require the borrower to pay only the interest on the loan for a set period of time, typically five to 10 years. This means that the monthly payments are lower than with a traditional mortgage, but you are not paying down the principal balance of the loan. After the interest-only period ends, you must start making payments on both the principal and interest. This type of mortgage can be risky as you may not be able to afford the higher payments once the interest-only period ends.
Portfolio loans are not typically sold to investors in the secondary market like other mortgage loans. Instead, the lender holds onto the loan and manages it as an asset. Portfolio loans are often used for borrowers who may not qualify for a traditional mortgage due to factors such as self-employment, non-traditional income, or a unique property type. These loans can offer you more flexibility in terms of underwriting criteria and may be customized to fit your specific needs.
Renovation mortgages allow you to finance the cost of renovations and repairs into your mortgage. This type of mortgage is typically used by homebuyers who are looking to purchase a property that needs significant repairs or upgrades, as well as homeowners who want to make improvements to their existing homes. Renovation mortgages can be a great option if you want to make upgrades to your home but don't have the cash on hand to pay for the renovations upfront.
Nonqualifying mortgage loans, also known as nonQM loans, do not meet the criteria for a conventional or government-backed mortgage, such as a Fannie Mae or Freddie Mac loan. These loans are typically offered by alternative lenders and may have different requirements, such as higher interest rates or lower loan-to-value ratios. Nonqualifying loans are often used by borrowers who have poor credit or cannot meet the strict requirements of conventional mortgages. However, they can be riskier for borrowers and may lead to higher costs over time.
ITIN loans are loans designed for individuals who do not have a Social Security number but have an Individual Tax Identification Number (ITIN). These loans are often used by nonresidents, foreign nationals, and undocumented immigrants to buy a home, start a business, or finance other goals in the United States. Since ITIN holders are not eligible for traditional loans without a Social Security number, ITIN loans offer an alternative source of funding. However, ITIN loans often come with higher interest rates and stricter eligibility requirements than traditional loans.
Professional mortgage loans are specifically designed for self-employed professionals such as doctors, lawyers, architects, chartered accountants, and others. These loans are aimed at meeting the financial needs of self-employed professionals, such as funding to expand their business, purchase equipment, renovate their workspace, or meet any other professional requirements. The loan amount, interest rate, and repayment terms vary depending on the lender and the borrower's creditworthiness and financial history.
When you are selecting a mortgage, first determine how much you can afford to pay each month. This will help you decide on the loan term and interest rate that work best for your budget. Consider the type of mortgage, including whether you want a fixed-rate or adjustable-rate loan. Other important factors include the down payment, closing costs, and any fees associated with the loan. It's also a good idea to shop around and compare different lenders to find the best deal. Finally, make sure you read and understand all the terms and conditions of the mortgage before signing on the dotted line.
Take time to understand all of your mortgage options before deciding on the type of mortgage that is best for you. In addition to mortgage type, it’s also important to compare offers from different mortgage lenders.
Fixed-rate mortgages offer a stable interest rate over the life of the loan, while adjustable-rate mortgages have interest rates that can change periodically. Government-backed loans may offer lower down payment requirements or more lenient credit score requirements while conventional loans may offer more flexibility and faster processing.
Consider your financial situation and long-term goals as well as the pros and cons of each type of mortgage loan available to you. Finally, consult with a trusted financial advisor or mortgage professional to determine the best option for your specific needs.
Experts recommend that you spend no more than 28% of your gross monthly income on housing expenses, including your mortgage payment, property taxes, and homeowners insurance. This is known as the "front-end ratio." Additionally, experts recommend that you spend no more than 36% of your gross monthly income on all debt payments, including your mortgage, credit card payments, car loans, and other debts. This is known as the "back-end ratio."
A second mortgage is a type of loan that lets you borrow against the equity in your home. It's called a second mortgage because it's in addition to the first mortgage that you already have. This type of loan can be useful if you need to access cash for things like home improvements, debt consolidation, or major expenses.
Mortgage lenders typically use a version of the FICO score when evaluating a borrower's creditworthiness. However, there are different versions of the FICO score available, and lenders may use one or a combination of them to make their lending decisions. Lenders often consider additional factors beyond credit scores when determining mortgage eligibility, such as income, employment history, and debt-to-income ratio.
The five Cs, or characteristics, of mortgage lending are:
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