Understanding the Language of Home Financing

You have several options when you are searching for a mortgage loan to purchase a house. Some require that you have the highest credit scores and significant assets in the bank, but if you are a first-time home buyer, there is a mortgage that fits your needs as well. We will explore some of your options below:

Conforming Mortgage Loans

The Federal Housing Finance Agency or FHFA sets dollar limits for mortgages, so any mortgage that conforms to these limits is considered to be a “conforming loan.” Conforming loans also fit the criteria for the Federal National Mortgage Association or Fannie Mae and the Federal Home Loan Mortgage Corporation or Freddie Mac.

The loan limit for the current year in the United States is $766,550, but it may be higher or lower based on the location of the property. The borrower must also meet the requirements for the loan-to-value ratio, debt-to-income ratio, credit score, credit history and documentation.

Conforming loans are beneficial because they offer low interest rates. They also require down payments of only 3.5%.

Nonconforming Mortgage Loans

A nonconforming mortgage loan does not meet Freddie Mac’s or Fannie Mae’s guidelines. Banks do not favor nonconforming loans because they are more difficult to sell, so they are considered risky loans, and the bank can charge higher interest rates for them. The mortgage loan will be nonconforming if the borrower is allowed to offer a low down payment. If it is a conventional mortgage loan, a low interest rate may be 10%. If it is an FHA loan, a low interest rate may be 3%.

Borrowers must not have a debt-to-income ratio higher than 43%, and their credit scores must not be lower than 660.

A Type of Nonconforming Loan: The Jumbo Loan

As was mentioned above, a conforming loan cannot exceed $766,550 in most cases. You can obtain a larger mortgage loan amount, but it will be a jumbo loan. Jumbo loans are riskier for lenders because Freddie Mac and Fannie Mae do not guarantee these loans. In this case, lenders may be required to keep these loans on their books because they cannot sell them.

The requirements for a jumbo loan are stricter than for conforming loans. For example, the down payment may need to be between 10% and 20% or even higher. Your credit score will need to be between 700 and 760. Your debt-to-income ratio will need to be 43% unless you have a significant amount of cash in reserve.

FHA Mortgage Loans

An FHA mortgage loan is a mortgage loan for which the FHA insures. The FHA developed this program to expand homeownership to those who couldn’t previously qualify for mortgage loans. These mortgage loans are very advantageous for lenders because the lender will receive payment for the loan if you default.

They are also advantageous loans for borrowers. FHA mortgage loans require a low credit score to qualify. They also require that you pay lower closing costs, and they allow you to make smaller down payments. It is a great option for first-time homebuyers without a huge down payment to offer a lender.

The First Type of FHA Loan: The Graduated Payment Mortgage

This mortgage loan is for people who expect their incomes to increase over time. At the beginning of the term, their lenders require them to make lower monthly payments, but as time goes by, these payments increase.

The Second Type of FHA Loan: The Growing Equity Mortgage

The Growing Equity Mortgage is a form of fixed-rate mortgage loan. The lender can pre-schedule additional payments that will increase as time goes by. In most cases, they increase by 5% each year. This strategy allows you to pay your mortgage in full in less time at the same time that you decrease the amount of interest that you pay.

VA Mortgage Loans

The Department of Veterans Affairs developed a loan program to offer loans for active-duty servicemembers, veterans and their spouses to purchase a house. The qualifications for these loans are up to the VA. The VA also sets the terms for these loans. Most importantly, the VA guarantees loans that fall under this program. In some cases, you can obtain a VA loan without the requirement of offering a down payment.

Along with not needing to offer a down payment, you will not be required to pay mortgage insurance. You will also have limits on the closing costs you must pay, and you are within your rights to prepay your mortgage without having to pay a penalty. If it becomes difficult for you to make your monthly mortgage payments, the VA may help you avoid defaulting on the loan.

A Type of VA Loan: The Cash-Out Refinance

A cash-out refinance mortgage loan allows you to obtain an amount of money for your needs. For example, you may have credit card debts you would like to pay off, or you may need to make repairs on your home. If you have a conventional loan and you qualify for a VA mortgage loan, you can apply for a cash-out refinance.

With a cash-out refinance, you may change the terms of your current loan. For example, if you can qualify for a lower interest rate, you will be able to lower your monthly payment. A cash-out refinance is also an excellent way to obtain the money you need for large purchases. You will apply for a VA mortgage loan that is larger than the amount you owe on your current loan. Then, your lender will pay your current loan in full and give you the balance in cash.

To qualify for a VA loan, you must meet the lender’s requirements and the requirements that the VA sets for mortgage loans. You must also qualify for the Certificate of Eligibility.

The type of mortgage loan is just one option that you have to choose. You may also decide on the interest rate and the length of the term. Now is the time to get to work on finding the best option for you.