Your home mortgage is the largest financial commitment you will make in your lifetime. It’s important that you know as much about the home mortgage process as possible, including loan types and the approval process.
Rachel Lee Realty, one of the leading realtors serving the southeastern Houston area, has prepared this guide to provide you with basic guidance on home mortgages. As always, for questions that pertain to your credit situation, it is always best to contact your bank and/or other preferred lending institution.
Non-Government Issued Loans
There’s a long list of mortgage loan types. If you’re getting your first mortgage or changing your approach to securing a mortgage with your new home, analyzing and understanding the differences can be a headache. Therefore, Rachel and her team wanted to provide a brief summary on the various types of mortgage loans, their purpose, and when they would be right for you.
Here, we will review non-government issued loans.
Conventional Mortgage. These are mortgage loans that’s not backed or insured by the government. Compared to government-backed loans, these typically feature lower interest rates. However, the qualifications are a bit steeper. Typically, lenders look for borrowers to have at least a 680 FICO credit score. In addition, lenders typically desire a 5% down payment. However, to ensure home equity (as well as avoid private mortgage insurance fees), you would want to make a down payment of 20%.
Conforming Mortgage. These loans are conventional loans, but the loan amount is equal or less than the limit established by the Federal Housing Finance Agency (FHFA for short). These also meet the funding criteria for government-sponsored enterprises Fannie Mae and Freddie Mac. The limit for 2019 as announced in November 2018 is $484,350.
If you have excellent credit, these loans have significant advantages, especially with low interest rates.
Other guidelines that are typically included with conforming loans including loan-to-value ratio (down payment), debt-to-income ratio (monthly debt obligations versus gross monthly income before taxes), credit score, and credit history.
Jumbo Mortgage. This type of mortgage exceeds FHFA limits. Lenders regard these as riskier mortgages (due to the substantially larger amounts), therefore these loans have stricter requirements. Typically, lenders require you to have excellent credit and higher income to qualify for a Jumbo Loan.
Fixed rate versus floating (adjustable-rate) mortgages
There are two directions that a borrower can go in to repay their loan. These options are based upon various factors, including loan amount, loan term, your credit profile, and income.
Fixed-rate mortgages are simple—your rate stays the same for the entire length of the mortgage, whether it is a 10-, 15-, or 30-year mortgage.
Adjustable-rate mortgages or ARMs are a little bit more complex.
Adjustable-rate mortgages were designed with flexibility in mind. ARMs will often start a lower rate than their fixed-rate counterparts. The rate may stay the same for a few months or a few years. Afterwards, your rate will change, and your monthly mortgage payment is likely to increase.
The Consumer Protection Finance Bureau recommends that before you take out an ARM mortgage
- Find out how high your rate and your payment can go
- How frequently your rate will change
- When your payment can go up
- Are there caps and limits as to how high your rate can go up and down
- Affordability once the rate and monthly payment reaches a higher rate (and payment)
Remember, get approved first
Before you shop for your new home, it is important that you get pre-approved first. It saves quite a bit of time and heartbreak—you don’t want to fall in love with a house that you can’t get the funding for. With a pre-approval, you know how much the lender is willing to give you for your mortgage loan and you can shop for the right home that fits the conditions of the loan.