Different types of mortgages
What types of mortgage loans are there? The most common types of mortgage loans include the conventional loan, jumbo loan, government-insured loan, fixed-rate mortgage, and adjustable-rate mortgage. The conventional or conforming loan meets the standards of the Federal Housing Finance Agency, with regard to both the credit and loan size. The conforming loan limits might vary from one state to the other. If a loan does not meet the FHFA standards, it is presented as non-conforming, being recommended to borrowers who are looking to purchase a high-priced or luxury property.
Shopping for a mortgage loan can be daunting, as there are so many different mortgage options presented to borrower. Explore mortgage options before you commit to any particular loan. You might also want to remember that not all mortgage loans are the same. The more you research your options, the easier it will be to choose a loan that suits your financial situation. It will also open your eyes about potential expectations, especially when it comes to the terms and conditions of the respective loan agreement.
What is a mortgage loan? In simple terms, a mortgage loan represents a financial option that allows borrowers to purchase a property or borrow money, against the value of a property they already possess. The loan agreement comes with specific terms and conditions, and both the borrower and lender have to be satisfied with the respective mortgage loan. The borrower is obliged to repay the respective sum according to a set payment schedule, with interest; should he or she default on the payment, the lender is entitled to recover the debt by taking the property. Mortgage loans represent the most common loan options out there.
Industry experts draw attention to the things we should look for in a mortgage. The list includes but is not limited to the following: loan size, interest rate & associated points, loan closing costs (including the fees of the lender), annual percentage rate, type of interest rate (fixed or adjustable), loan term, risky features. Before committing to anything, borrowers should inquire whether the interest rate can be changed. In addition, they should make what kind of risky features are associated with the respective loan. For example, there might be a balloon clause, negative amortization, interest-only feature, or pre-payment penalty.
The mortgage loan is actually one of the most common types of loans, allowing you the opportunity to borrow a sum of money against your property. The loan agreement is settled between you, the borrower, and the lender, often in the form of a financial institution. Should you fail to repay the money borrowed, plus interest, the lender reserves the right to take your property. If you are interested in taking on a mortgage loan, you should definitely keep reading this article. In the paragraphs below, you will discover useful details on various types of mortgage loans, the difference between a fixed and an adjustable interest rate, and so much more.
Conventional loans
A conventional loan can be used to purchase a property, either as a primary residence or for investment reasons. Borrowing costs are lower than the ones associated with other mortgage loans, but the interest rates might be higher. As for the downsides, it might require a higher down payment than government loans, and the borrower must have a DTI that varies between 43 and 50%. If the down payment is under 20% of the sales prices, you will also have to cover the private mortgage insurance. Last, but not least, the verification procedure is complex, focusing not only on your income and employment, but also on the down payment and various assets. Conventional loans are recommended for those who can afford a sizable down payment, with a strong credit score. The best option has a fixed rate and a 30-year payment schedule.
Jumbo loans
The jumbo loan is usually recommended to those who are interested in purchasing a high-priced or luxury property. It is common knowledge that the loan falls outside the FHFA borrowing limits, being best suited for borrowers who have an exceptional financial situation. This type of loan allows one to borrow more money than it would be possible with a conventional mortgage and the interest rates are usually quite competitive.
Jumbo mortgage borrowers must be prepared for a down payment that varies between 10 and 20%, with a stellar credit score and a DTI ratio of under 45%. They must also offer proof of cash reserves, jewelry, or other significant assets. In addition, the application process is more complex, requiring in-depth documentation for one to qualify. If you are looking to purchase a property and the selling price exceed the conforming loan limits in your state, you should definitely consider a jumbo loan.
How to get a jumbo loan?
Government-insured loan
Even though the government is not precisely a mortgage lender, it does facilitate ownership. There are three different government agencies that back mortgages, meaning the Federal Housing Administration, the US Department of Agriculture, and the US Department of Veterans. Government-insured loans might be considered by borrowers who do not qualify for a conventional loan, with more relaxed credit requirements and no down payment. Borrowers should be aware that the loan limits are lower than the ones of conventional mortgage and there is also the condition of having to live in the respective property.
The FHA loans have competitive interest rates and make ownership possible, without the borrower having to provide a significant down payment or an excellent credit score. The USDA loans are rather recommended for borrowers with a moderate or low income, with specific areas of eligibility. Some of the loans provided by this agency can be taken without a down payment, but borrowers should be prepared to cover the extra fees. The VA loans are recommended for the US military member, meaning those on active duty and veterans, as well as their families. The loans are flexible and have a low interest rate, without specific requirements related to the mortgage insurance, credit score, or down payment.
Fixed-rate mortgage
The fixed-rate mortgage loan is a popular choice, with the interest rate remaining the same for the entire loan period. Borrowers can typically choose loans with a 15 or 30-year repayment schedule, but some lenders might be more flexible whereas such matters are concerned. Fixed-rate mortgages have the main benefit of stability, allowing borrowers to budget their expenses more effectively. On the other hand, if the interest rates fall, the borrower will have to refinance the respective mortgage, in order to benefit from a lower rate. It is also worth mentioning that the interest rates are usually higher than the ones seen in adjustable-rate mortgages.
Adjustable-rate mortgage
The adjustable interest rate mortgage is known for the fluctuating interest rates, which change according to the market conditions. It might be possible for a loan to change, with the interest rate becoming adjustable instead of fixed. Before signing the loan agreement, make sure you have read it thoroughly; check out the fine print to know if the rate is liable to change and how much you will have to pay in the end. Such loans have a lower rate in the first years, allowing you to save money on interest. However, if the interest rates skyrocket, you might become unable to meet the monthly payments. Such loans are also harder to refinance.
Fixed versus adjustable interest rate mortgage
When it comes to taking on a mortgage loan, you might have the opportunity to choose between the fixed or adjustable interest rate. With the first, you are guaranteed that the loan will maintain the same interest rate throughout its entire period. On the other hand, by going with an adjustable-rate mortgage, you will be subjected to fluctuations.
It is also possible for an adjustable-rate mortgage to begin with a more affordable interest rate, in contrast to the fixed-rate mortgage. The initial rate might not change for some time, depending on the loan. This is known as the introductory period, and it might last for several years. When this period is over, you should expect for the interest rate to change, with higher monthly payments to be covered.
If you are interested in an adjustable-rate mortgage, it will pay off to perform a thorough research first. It is essential that you find out how high the interest rate might reach, as this will influence your monthly payments as well. Inquire how frequently is the interest rate adjusted and how soon you might expect for the payments to go up. Check to see if there is a cap or a limit on how high the interest rate might reach. Most importantly, make sure that you will be able to afford the loan, should both the rate and payment reach the maximum allowed limit.
Fixed-rate mortgages vs. adjustable-rate mortgages
The fixed-rate mortgage has a set rate of interest, which will not modify for the entire duration of the loan. With the adjustable-rate mortgage, the rate might be initially set below the market value, but it will rise with the passing of time. There are situations, though, in which the interest rate might fall instead of rising. Fixed-rate mortgages are more preferred by borrowers, as they are easier to manage and budget. On the other hand, the adjustable-rate mortgage is typically more complicated and bears additional risks.
By opting for a fixed-rate mortgage, you will benefit from adequate protection, should the mortgage rates change all of a sudden. As for the adjustable-rate mortgage, this is usually more affordable than the fixed-rate version, but this is only for the first years. If the interest rates are high, it might be difficult to qualify for a fixed-rate mortgage, especially if you do not meet the financial requirements (income and credit score in particular). With the adjustable-rate mortgage, you should keep in mind that payments are highly likely to change from one month to the other. These changes might make it difficult for you to manage and budget your loan.
Other types of home loans
Depending on the financial institution, you might find other types of loans available. For example, if you are planning on building a home, you should consider a construction loan. This type of mortgage covers both the desired financing and the associated construction costs. Borrowers should be prepared for a higher down payment, with lenders requiring proof that you are able to afford your mortgage payments. Balloon mortgages require a significant payment to be made when the loan ends. This might not be a good situation to go through, especially if your credit situation takes a turn for the worse.
Interest-only mortgages are loan options in which borrower cover interest-only payments for a specific period of time. They will then cover the payments for the principal and interest. Such loans are usually recommended for those who are looking to refinance their property in the future or for those who are confident in their ability to repay the said debt. Piggyback loans refer to a financial option which includes not one, but two loans. A loan is taken for the respective property, with the other loan being actually the down payment. These loans help borrowers avoid the dreaded mortgage insurance.
What is required to get a mortgage?
Knowing the mortgage requirements is essential when it comes to finding the best options out there. Lenders have raised the loan limits, hoping to guarantee added borrowing power to potential borrowers, provided they are able to qualify for a mortgage. As always, lenders are doing their best to adjust to the market fluctuations, always coming from the ever-increasing interest rates and rising property prices.
The first thing to remember is that the loan requirements will vary from one type of mortgage to the other. According to industry experts, the conforming loan limits are expected to be the highest this year, in comparison with previous decades. Both conventional and FHA loans require a down payment; with the FHA loans, that varies between 3 and 3.5%, if the borrower has a credit score of 580. Should the score vary between 500 and 579, the down payment will be 10% of the purchase price. VA and USDA loans do not require down payments.
With the conventional loan, the desired credit score is 620. If the credit score is 580, the down payment will have a value of 3.5% of the purchase price. Should the score once again vary between 500 and 579, the borrower will have to cover a down payment of 10%. VA loans do not have a minimum credit score, but the standard value is 620. The same goes for the USDA loans, with the exception that the lender standard value is 640.
Mortgage insurance might be required for all types of loans and, as the borrower, you will have to calculate your budget accordingly. The DTI ratio also varies from one loan to the other, influencing the value of the down payment. If the borrower has a high DTI ratio but is able to offer proof of ample cash reserves and residual income, exceptions might be made. The loan limits for single-family units differ from one state to the other, so it is for the best to check them before committing to a particular loan agreement or lender. This is valid for conventional and FHA loans, not for VA and USDA loans.
Upon applying for a mortgage loan, the lender will review your financial situation. The two main points of focus regard your eligibility and level of risk. It is customary for the specialist to consider your income and other sources of finances, including cash reserves, jewelry, real estate, etc. Your credit score and DTI ratio are part of the equation as well, influencing one another, as well as the down payment to be covered. Of course, the lender will also perform the appraisal of the property you are considering borrowing against. This is required by law, in order to establish if the respective property value will cover the new loan amount or not.
How to get pre-approved for a mortgage?
Many potential borrowers are confused when it comes to getting pre-approved for a mortgage. However, this can be an important step to take and it's essential to shed some light on the topic. As the borrower, you will have to contact the desired lender and inquire about the pre-approval letter. Once you have obtained it, you can set up a meeting and discuss your loan options, as well as the budget, with the lender. This part of the process can bring clarifications whereas your budget is concerned, not to mention you will be able to establish the limit of monthly mortgage payments you might be able to afford.
The recommendation is to go through the pre-approval process with more than just one lender. In this way, you will be able to compare the proposed mortgage rates and make sure that you have found the best deal. The mortgage pre-approval letter will also look good in the eyes of the seller, as it stands as proof that you are serious about your buying intentions. Factors analyzed by lenders as part of the pre-approval process include the following: debt-to-income (DTI) ratio, loan-to-value (LTV) ratio, credit history, FICO score, income, and employment history.
You can begin by submitting a mortgage application, giving the lender your social security number to the lender. This is necessary for the credit check procedure. In addition, you should prepare all the documents that might be required, including income proof and tax returns. As part of the process, you will have to document your employment history, followed by a thorough description of your assets and liabilities. If you are self-employed, additional documentation might be necessary. The lender will review your application and offer the pre-approval letter. Depending on the case, the pre-approval might be offered with conditions or even denied.
Many borrowers are happy to discover that they are able to qualify for a loan. However, a good lender will take his/her time to explain your options, pointing out the risks that come with the respective agreement. It is essential to remember that mortgage loans imply a significant financial commitment. Keep in mind that just because you have qualified for a big loan, this doesn't necessarily mean you can afford it. This is why the pre-approval process matters so much.
Is it possible to get a mortgage loan without a credit score? Yes, it is possible. This happens with borrowers who have managed to pay off all of their debt before applying for the respective mortgage. If you find yourself in this situation, you will have to go through a process called manual underwriting, where you are basically providing all the necessary documentation regarding your financial situation. Keep in mind that the loan process might be delayed as a result, but the advantages are obvious.
You might also want to learn about the different between being pre-qualified and pre-approved. Once you had a meeting with the lender, having discussed things like the down payment, assets, and income, you can consider you have taken the right steps to be pre-qualified. On the other hand, the pre-approval process is more complex, as the lender has to verify your financial documents and move on with the loan requirements. The pre-approval process typically requires more time and extensive documentation, but it is essential for the mortgage loan application success.
If you are interested in taking on a mortgage loan, the first thing that you need to do is research different lenders and their financial proposals. As you have seen, there are different types of loans available, each with their own requirements and implications. In choosing a particular type of loan, you will have to consider your own circumstances and ability to meet the monthly payments. You can discuss with the lender about fixed and adjustable rates, choosing a loan option that suits your needs the most. Make sure to ask as many questions as possible before committing to a particular loan or lender. Always remember that you are taking on a new loan, which implies a significant financial commitment.
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