The largest financial commitment of most of our lives is buying a home. Yet many of us go into the process with little or no knowledge of the mortgage world. Luckily, this is a highly regulated field, but there is still a lot to know to ensure you get the best deal for you and your family. This is quick overview of the basics.
What’s a Mortgage?
Simply put, a mortgage is a loan and it is made up of two basic components: principal and interest. Principal is the actual loan amount. Interest is the additional amount the lender charges you for borrowing the money over time. The life of your loan (mortgage term) is paid in monthly installments. This set schedule is referred to as your amortization schedule.
Main Types of Mortgages
Different mortgage types have different lending or qualification requirements and rates. The more “standard” a loan is, the better the rate typically is. The more unique a loan is, the rates tend to creep up. Knowing these differences is important when shopping for your mortgage.
Conventional Mortgage – This is the staple of the industry. It is intended for borrowers with good credit, verifiable employment, solid income history, and be able to demonstrate an ability to make the down payment. Many conventional loans are backed by Fannie Mae or Freddie Mac. Down payments range from 3% to 20%. Please know that borrowers being able to have a least 20% down payment, can many times avoid Private Mortgage Insurance (PMI) which is a savings on a monthly basis.
Conforming Mortgage – These loans typically are not underwritten (backed) by Fannie Mae of Freddie Mac for a variety of reasons. Conforming loans are limited by the Federal Housing Finance Agency (FHFA)and range from around $480,000 to $765,000.
Nonconforming Loans or Jumbo Loans – These loans cant be bought or sold by Fannie or Freddie. These loans exceed the guidelines and loan amounts for conforming loans. These loans have inherently more risk. Consequently, they have stricter requirements such as better credit, stronger employment, better cash reserves and typically require down payments of 20%.
FHA-Loans – First time homebuyers find this a viable option for the mortgage. Typically suited for low-to-moderate income buyers. These loans are insured by the Federal Housing Administration (FHA) and are perfect when they cannot qualify for a traditional conventional loan. FHA loans have lower requirements for down payment (as little as 3.5%) as well as lower credit score thresholds. These loans are directly lent by the FHA, yet the guarantee the loans from FHA-approved lenders. Note FHA loans require payment of a mortgage insurance through the lifetime of the loan.
Veterans (VA) Loans – Similar to FHA Loans, VA loans are guaranteed by the US Department of Veteran Affairs. This is only available to qualified military members, veterans, and their spouses. Up to 100% of the loan amount can be borrowed (no down payment) and other benefits including a cap on closing costs, no broker fees, no mortgage insurance.
