There are countless mortgage products that each has their own unique qualification requirements, lengths, interest rates, and advantages and disadvantages. There are many niche mortgage products designed for very specific circumstances and there are other products that are designed for the typical homebuyer. Most homebuyers do not even realize how many options there are in their state which is why it is important to consult a mortgage lender before you start looking at homes so that you can be armed with information when you begin to seriously consider making a purchase. Below are just some of the mortgage products available and who they are best suited for.
Fixed-rate mortgages are available in different loan lengths such as 15 year or 30 year fixed-rate mortgages. They are ideal for the conventional buyer that wants a consistent monthly mortgage payment over the life of the loan.
Adjustable-Rate Mortgage (ARM)
There are different Adjustable-Rate Mortgage (ARM) lengths such as a 5 or 7 year ARM. The interest rate will remain fixed for the first period of time (5 or 7 years) and then after that time the interest rate will be subject to market changes and will periodically adjust which means your mortgage payment may increase. This type of loan is ideal for someone that either knows they will move before the fixed-rate period ends or feels confident they will be able to refinance before that time comes.
An FHA (Federal Housing Administration) loan is one that is managed by the Department of Housing and Urban Development (HUD). Government-issued loans, such as an FHA loan, are suitable for many different home buyers but particularly so for first-time homebuyers. FHA loans often have lower requirements for down payments (sometimes as low as 3.5%). But, just as always, if you do not make a 20% down payment you will have to pay private mortgage insurance (PMI).
A jumbo loan is a loan that exceeds the “conforming loan limits” that have been established by Fannie Mae and Freddie Mac. The conforming loan limits are based on the average home price in an area. You must have very good credit and a large down payment to qualify for a jumbo loan since the large loan amount represents a greater risk to the lender.
A VA loan is one that is issued by the U.S. Department of Veterans Affairs and is another type of government loan that is available specifically to people who have served in the military and are veterans, are active duty service members, or are National Guard members or reservists. Additionally, spouses of military members who died while on active duty or as a result of service-connected disability may be eligible for a VA loan. VA loans offer a significant advantage over other loan options because they do not require a down payment. VA loans can be 100% financed.
Many people are not familiar with USDA (U.S. Department of Agriculture) loans but they exist to serve rural borrowers. This type of mortgage is ideal for rural residents that have a steady but low or modest income but cannot obtain housing through conventional loan options. USDA loans do not require a down payment.
Option 3: Jumbo vs. Conforming Loan
There is another distinction that needs to be made, and it’s based on the size of the loan. Depending on the amount you are trying to borrow, you might fall into either the jumbo or conforming category. Here’s the difference between these two mortgage types.
A conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). Simply put, they buy loans from the lenders who generate them, and then sell them to investors via Wall Street. A conforming loan falls within their maximum size limits, and otherwise “conforms” to pre-established criteria.
A jumbo loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.
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