The world of home loans, or mortgages, can seem intimidating, so we’ve assembled this beginner’s guide to mortgages to help put you in a more informed position before you meet with potential lenders. That way you’ll be better able to evaluate which advice makes the most sense for you and/or your family.
For example, once you start learning about mortgages, you may see that roughly 75% of all home loans are “conventional fixed rate mortgages.” What does that mean, exactly? And what are the other 25%? Let’s break it down…
TYPES OF MORTGAGES
Virtually all home loans fall into two major types Conventional or Government-Backed, and within these there are many sub-types. First, we’ll look at Conventional ones.
Conventional Mortgage Loans
Conventional mortgages don’t have government insurance backing them, so you’ll need to meet a higher financial history standard in order to qualify. If you have
- a strong credit score (usually 620 or more),
- a debt-to-income ratio under 50%
- can manage a down payment of 3% or more
- and have a stable financial history
this may be a good option for you.
The two main types of Conventional Loans you’ll encounter are Conforming and Jumbo
Conforming Loans “conform” to a maximum lending amount that prevents lenders from giving mortgages to people who can’t afford the payments. The upper limit on a mortgage is set by the regulating agency known as FHFA (Federal Housing Finance Agency) and the two government-sponsored enterprises (GSEs) it regulates, and is adjusted for each U.S. county.
- What is the limit for Wake County in 2021? It’s $548,250 all across NC in 2021. (Note it can run as high as $822,375 in high-cost areas like NYC or Hawaii).
- What are GSEs and why do they matter? The two GSEs are Fannie Mae and Freddie Mac. They invest in the mortgage market by purchasing loans from lenders, which helps ensure there’s money circulating for lenders to keep giving out.
So, what happens if you need a mortgage larger than $548,250? That’s where the second type comes into play: Jumbo loans.
Jumbo loans are generally Conventional, but designed for higher-priced homes. If the home you want costs more than your county’s cap, you’ll either need to make a down payment that closes the gap, or apply for a Jumbo Loan. You’ll also most likely need a higher credit score (often 700 or more), and larger down payment (e.g., 20%).
Government-Backed Mortgage Loans
- FHA Loans are insured by the Federal Housing Administration: these are designed to make home ownership available to people with lower credit scores (usually a FICO score of 500 to 579 if you’re putting 10% down, or 580+ with 3.5% down); they also allow gift money to be part of the down payment.
- VA Loans are backed by the Dept of Veterans Affairs, and available to veteran or active service members. Often, no down payment is required. (There are VA Jumbo loans, too.)
- USDA Loans are sponsored by the Dept of Agriculture, and designed for lower-income applicants from rural areas. They require no down payment.
Another mortgage type factor is how the loan is repaid, and the way INTEREST is factored in: Fixed Rate, Adjustable, and Balloon. One thing to note: the Principal is the main amount you’re borrowing—for example, $250,000—the Interest is the fee you pay to the entity lending you the money.
- Fixed rate means the interest rate is the same from first payment to last.
- Adjustable rate mortgages (a.k.a. ARMs), come in many different types. Often, they’re “fixed” for a certain number of years, and then the rate fluctuates for the rest of the loan period according to going rates. Others are structured so you pay only the interest for a certain number of years, and then the loan reverts to variable interest.
- Balloon loans are unusual in that for the first period (5 or 10 years, for example), you pay only the interest on the loan—no money goes toward the principal. When that initial period is up the full principal becomes due.
The final consideration is the mortgage TERM: while most lenders offer 15 or 30-year mortgages, it’s possible to find different intervals too, like 10-, 20- and 40-year home loans.
Choosing the best mortgage for you will involve a look at your credit history, available down payment, monthly payment you can afford, how long you expect to stay in the house, and your best guess about your financial future. This Beginner’s Guide to Mortgages can get you started, but when it comes time to get serious, it’s best to consult with a mortgage expert or trusted banker. And when you do, we’ll look forward to helping in the search for your dream home!