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Buying a House? Let’s Talk About Mortgage Options.

1.) Conventional Mortgages

The type of home loan that is not secured by a federal government is called a conventional mortgage. Conforming and non-conforming loans are the two kinds of conventional loans.

The loan amount that lies within the jurisdiction of the FHFA (Federal Housing Finance Agency) is a conforming loan. And, the other kinds of mortgage loans failing to meet the guidelines set by the FHFA are non-conforming loans. The most popular non-conforming loans are the Jumbo loans. Also, they represent bigger mortgages above the limitation of the FHFA set for individual counties.

Lenders, in general, need to pay for PMI (Private Mortgage Insurance) when applying for a conventional loan. This is a requirement if you want to put down 20% or less of your home’s purchase amount.

Conventional mortgages: Pros

  • You can use it for an investment property, secondary, or primary home
  • Borrowing costs are lower compared to other mortgage loans, even if the interest rates are a bit higher
  • After reaching 20% equity, you can cancel your PMI by requesting your lender
  • You can pay down a minimum of 3% on loans backed by either Freddie Mac or Fannie Mae

Conventional mortgages: Cons

  • A 620 FICO score or higher is a must
  • The debt-to-income ratio has to be 45 to 50%
  • You have to pay for the PMI if the down payment is below 20% of your house’s buying price
  • Requirement of adequate documentation to verify your assets, income, employment, and down payment

Who can take?

Borrowers who have a strong credit score, stable employment history and income, and a minimum of 3% down payment are perfect for conventional loans.

2.) Jumbo Mortgages

A jumbo mortgage is another type of conventional mortgage with non-conforming loan limitations. It means, your home price is greater than the federal loan limitations. For 2021, the highest conforming loan limit set for homes with single-family is $548,250 in most parts of the US. And, in high-cost areas, the maximum is $822,375. Moreover, jumbo loans are popular in high-cost areas and it requires in-depth documentation for anyone to qualify.

Jumbo mortgages: Pros

  • Flexibility to borrow money to purchase a home even in expensive areas
  • Interest rates are competitive compared to other types of conventional loans

Jumbo mortgages: Cons

  • 10 to 20% down payment is a must-have
  • While a 700 FICO score or higher is a must to qualify, certain lenders require a minimum of 660 FICO score
  • The debt-to-income ratio should be under 45%
  • Having adequate assets (normally 10% of the loan amount) in either savings accounts or cash

Who can take?

Jumbo loans are perfect for wealthy buyers who intend to buy a high-end home. Borrowers should have an excellent credit score, a considerable down payment, and high income. Many reputable jumbo loan lenders offer competitive rates. But, whether a person needs such type of loan depends on the extent of financing. And, not determined by the cost-price of the property.

Bankrate’s calculator can help you find out your affordability when buying a home.

3.) Government-Insured Mortgages

While the US Government doesn’t lend mortgage loans, it plays an integral role in helping more people to become homeowners. The three government-backed mortgage loans and agencies are FHA loans (The Federal Housing Administration), USDA loans (The US Department of Agriculture), and VA loans (The US Department of Veteran Affairs).

  • FHA loans – This kind of home loan helps Americans to make homeownership possible who don’t have enough resources for down payment or don’t have the requisite credit score. A minimum 580 FICO score is needed to receive a maximum of 96.5% FHA financing alongside a 3.5% down payment. Moreover, a credit score of 500 is even accepted when you put a 10% down payment. However, the FHA loans need a couple of mortgage insurance premiums. You can pay the first premium upfront, whereas the other one continues throughout the tenure of the loan. And, you have to pay it annually when you put less than a 10% down payment. That way, the total mortgage cost increases.
  • USDA loans – This kind of home loan is perfect for borrowers with moderate to low income to buy a home in rural areas. To qualify, you need to buy a home as per the USDA-eligible area along with certain income limitations. Moreover, some loans don’t even need a down payment for certain borrowers with low income.
  • VA loans – These loans provide low-interest and flexible mortgages for both veterans and active-duty personnel of the US military and their families. There is no need for PMI or down payment on VA loans. And, the closing costs are capped and paid by the seller. However, a funding fee is chargeable on VA loans. It’s a percentage of the total loan amount to balance the cost to the taxpayers. The funding fee and other closing costs need upfront payment when closing or rolled into the VA loans.

Government-insured loans: Pros
These loans can help you buy a home even if you don’t qualify for conventional loans

  • No need for large down payments
  • Credit score requirement is more relaxed
  • Eligible for first-time and repeat buyers

Government-insured loans: Cons

  • Most of these loans consist of mortgage insurance premiums and you can’t cancel them for certain loans
  • Overall borrowing costs could be higher
  • To become eligible, you need to provide sufficient documentation depending on the type of loan

Who can take?

Government-insured loans are best suited for people with less credit score, low cash savings, and ineligible for conventional loans. Qualified borrowers can get the best out of VA loans compared to other types of mortgage loans.

4.) Fixed-Rate Mortgages

As the term suggests, a fixed-rate mortgage maintains the same interest rate throughout the loan. It means the monthly payment for your mortgage stays the same. Fixed-rate loans have 15, 20, or 30-year terms.

Fixed-rate mortgages: Pros

  • The monthly interest and principal payments stay the same throughout the loan
  • It helps you to budget other monthly expenses with precision

Fixed-rate mortgages: Cons

  • You have to pay more interest on long-term loans
  • Building equity on your loan takes a long time
  • Interest rates are higher compared to the rates on an adjustable-rate mortgage loan

Who can take?

Fixed-rate mortgages might be the right choice if you are planning to stay for a minimum of 7 to 10 years. It provides stability to your monthly expenses.

5.) Adjustable-Rate Mortgages

Unlike the stability of a fixed-rate loan, ARM or adjustable-rate mortgage has interest rates that fluctuate. As such, these rates go up and down depending on the market trends. You can find many ARMs with fixed interest rates for certain years. After that, the loan charges variable interest rates for the remaining term. So, have a clear understanding of the monthly mortgage rate or interest rate and when they can increase. That way, you won’t find yourself in financial trouble whenever the loan resets.

Adjustable-rate mortgages: Pros

  • During the initial few years of the loan, you can enjoy a low fixed rate
  • It saves you a sufficient amount of money, which you might have paid as monthly interest

Adjustable-rate mortgages: Cons

  • Sometimes, the monthly loan payments can become unaffordable, leading to loan default
  • The value of your home might fall after a few years. And, it is hard to sell or refinance your asset before the mortgage resets

Who can take?

Before taking an ARM, you should be aware of the level of risks associated with it. If you aren’t thinking about staying in the home after a few years, ARMs can save you a lot on monthly repayments.

6.) Other Types of Mortgage Loans

Apart from these popular types of mortgage loans, you can find other kinds of loans when you are shopping around.

  • Construction loans – This type of loan comes in handy if you are planning to build your house. There are two ways of utilizing construction loans. You can apply for a separate loan to take care of your project and another one to pay it off. Or, you may wrap both of them. However, you need a bigger down payment and sufficient evidence to prove your affordability.
  • Interest-only mortgages – Here, the borrower needs to pay the interest on the mortgage for some time. When the period comes to an end, which can be five to seven years, the monthly payment increases. That’s when you are beginning to pay the principal amount. This kind of loan won’t allow you to build equity quickly because you are paying the interest during the initial years. The interest-only mortgages are best suited for people who will sell their houses or refinance them. Also, they are great for borrowers who can afford the high monthly payment afterward.
  • Balloon mortgages – Yet another kind of home loan that you may come across are balloon mortgages. This type of mortgage loan requires you to pay a large amount when the loan term is about to end. For a 30-year loan term, you have to make payments for a short period, say for seven years. After that, you have to make a larger payment on your outstanding balance. However, this can be daunting if you aren’t prepared for it. The balloon mortgage calculator is a great way to find out whether you need this type of loan, or not.

It is wise to consider your current financial situation before choosing any kind of mortgage. Review your needs and do proper research to know about the right type of mortgage loan for you. That way, it will help you reach your goals.

Contributed by Norge Borio, Sales Manager & Agent