Entering the world of homeownership can be a daunting task—and like 86 percent of the total homebuying population, you’re probably looking for mortgage loans to make it happen. Let’s walk through some information about specific loan types.
Making Sense of Mortgage Loans
You’ve heard about different kinds of mortgage loans: Conventional, FHA, VA, even USDA, and you might know the organizations, Freddie Mac and Fannie Mae—but what does it all mean? After speaking with friends and family, and hours of Google searches, you may have tons of data, but not know the next steps to take. Let’s focus on breaking down conventional mortgage loans.
Conventional Mortgage Loans: The Basics
Conventional mortgage loans are those which are not backed, insured, guaranteed, or in any way associated with a government-sponsored program. These come from private lenders, banks, credit unions, and other financial organizations.
Conventional loans can be more popular with sellers, as they are easier to process than other mortgage loans like the FHA Loan. This can give you a competitive advantage in multiple-offer situations. In places like Oklahoma, and most definitely Texas, with so many fast-growing cities, housing competition can be stiff.
Credit scores play a big role in application approval and interest rates, which can make some buyers hesitant to apply for conventional mortgage loans. Statistically speaking, to obtain a conventional loan, a borrower would want a credit score of at least 620 and for the best possible interest rates, a near perfect 740 is desirable to lenders. As of March 2017, the average American credit scores were 695 (FICO) and 673 (Vantage), not adjusting for any sort of demographic.
Taking that information into account, there are a number of people who are eligible to apply for and obtain conventional mortgage loans.
Limits, Conforming and Conventional Mortgage Loans
Conventional mortgage loans can also be organized into two basic groups based on certain circumstances—conforming or nonconforming.
Conforming mortgage loans, although privately funded, still follow the guidelines set by Freddie Mac and Fannie Mae, government-led companies. As such, limits for single-family loans of this type are currently capped at $424,100. The amount is larger in areas with higher-valued real estate, such as those outside of the contiguous States.
A nonconforming loan, also called a jumbo loan, is outside of the typical guidelines for that particular loan’s limits. This could be the result of a higher-priced custom home, or one in a newly renovated, up-and-coming area. But there are times, it’s a result of insufficient collateral and/ or poor credit. Because jumbo loans are seen as a risk to lenders, interest rates are often higher for the homebuyer and they may be charged additional insurance fees as well.
Interested in an Adjustable or Fixed-Rate Conventional Loan?
Now that we know the limits set on mortgage loans, it’s time to make an interest rate decision. Your choice of the adjustable or fixed rate will ultimately determine what your monthly mortgage payments look like. This is, of course, outside of taxes and fees across the life of your 10-, 15-, 20-, 25- or 30-year loan.
Variable or adjustable-rate mortgage loans (ARMs) periodically shift based on certain market factors. Although it may have an inviting initial rate, which is favorable, keeping the monthly payments lower, at the end of the specified interval, the rate will change. And based on the housing index at the time, the rate can either increase or decrease annually.
ARMs are usually suggested for new buyers who do not plan to “settle in” to this first home, and who plan to either move or refinance within a few years. There has been much written about the “dangers” of a variable-rate loan, but each buyer has to look at their situation and work with their mortgage company to make the best decision for their needs.
Fixed-rate mortgages are popular and provide greater stability and security. Just as it sounds, this mortgage loan has a rate which does not fluctuate over time, making it easier for the homebuyer to plan and budget. For families who are ready to put down roots, this is an excellent option. The only time the interest rate would change would be in the face of refinancing. Keep in mind, taxes and other fees can change the monthly payment over time, but the interest rate is guaranteed to remain the same.
Buying a home is a big step, which is both exciting and personal. At Mortgages USA, we pride ourselves on putting you at the center of this process. You will be paired with one of our licensed mortgage officers, who will work with you throughout the loan process from start to finish—and he or she will always be just a phone call away.
To learn more about how we can help you, visit our loan products page or give us a call at 800.600.6872.