There are a variety of mortgage loans types and funding options you may qualify for, depending upon your specific circumstances. You should really contact a mortgage professional when you feel you’re ready to buy a home, even if you’ve only just begun looking. They’ll be able to review your case in depth and get you pre-approved for a loan if you qualify. When you’re pre-approved, sellers are generally more willing to work with you because they know that the deal won’t fall through because you are unable to pay for it.
Fixed rate mortgages are loans with a fixed interest rate that is stable throughout the term of the loan. Just as it sounds, adjustable rate mortgages are loans with an interest rate that is subject to ‘adjustment’ and fluctuation. If you haven’t already, you can check out this page of our Home Hunting and Purchasing Guide to learn about fixed rate mortgages and an adjustable rate mortgages in greater detail. Both may or may not be conventional loans.
Mortgage Loans Types – Conventional Financing
Conventional loans are loans that are not backed by the U.S. government. They may be conforming or non-conforming. Conforming loans are loans that conform to the lending guidelines set down by Fannie Mae and Freddie Mac. If a loan is conforming then it may be sold whole or in shares on the secondary market. Lenders often want to sell the loans they have because it gives them the capital to invest in new loans. Fannie Mae or Freddie Mac are more willing to buy loans that obey their particular rules, so conforming loans are far more popular. Non-conforming loans are harder to sell, and therefore are usually only obtained and managed through certain private lenders.
The loan criteria for conventional loans tend to be a bit more stringent than with government-backed (non-conventional) loans. This is because the lender is taking a bigger risk in approving the loan. They know that if you should default, they will not be reimbursed by the government for a portion of your loan. Credit scores and credit history must generally be very good for a conventional loan. Borrowers must be able to show that they are fiscally responsible, stable, and have a history of repaying their debts. Conventional loans often have higher down payment requirements, lower loan to value ratios, and lower debt to income ratio requirements.
Mortgage Loans Types – Non-Conventional Financing
Non-conventional loans are loans that are backed all or in part (usually just partially) by the Federal Government. Non-conventional loans generally have easier income and credit standards. This means lower-income families, veterans, and other qualified applicants may be able to buy a home under the guidelines of the Federal Government.
Examples of Government-Backed Loans
FHA loans backed the Federal Housing Department (a sub-division of HUD) and are designed to help first-time homebuyers and families purchase a home when they might otherwise not have been approved. Higher loan to value ratios are permitted, as are higher debt to income ratios. Closing costs may be financed and down payments are often negotiable. FHA loans do generally come with a mortgage insurance requirement.
VA loans are backed by the Veteran’s Administration and are designed to help veterans of the armed forces find affordable housing. Qualified veterans are encouraged to apply as these loans may come with low closing costs, up to 100% financing, there is no mortgage insurance requirement, and usually no down payment is required.
These loans are guaranteed by the US Department of Agriculture and help individuals and families with low or very low income attain affordable housing in rural areas. Areas classified as ‘rural’ are pre-set by the Dept., and applicable homes must fall within these special residential zones. USDA loans may offer borrowers ‘no down payment’ options, lower closing costs, and come with less restrictive income guidelines.
If you’re interested in finding out which mortgage options you are eligible for, or want to learn more about conventional loans and today’s rates, please contact a mortgage specialist in your area.