If you’re like most consumers, you won’t purchase your new home all in cash. You’ll need a little help from a lending institution. But how do you pick a loan product that will do the trick?
As one of the largest investments you’ll ever make, a lot weighs on your decision. The following mortgage information will provide a foundational understanding of the basics and various types of lending mechanisms you can choose from.
A mortgage has two parts: principal and interest. The principal portion of the loan represents the loan amount. Interest is the add-on, or the cost for borrowing the money. The borrower is on the hook for paying both.
The APR, or annual percentage rate, includes interest rate and other loan fees. APR plays in a role in mortgage pricing, as well.
Fannie Mae and Freddie Mac, which you might have heard of, handle a lot of government-back conventional lending. You’re eligible for conventional lending if you have a solid credit score, good work history and at least 3 percent available for a down payment.
Conventional borrowers who put down 20 percent as a down payment can avoid paying private mortgage insurance, which is a monthly cost. Insurance may also be avoided with special low down payment programs.
For low- or moderate-income earners, an FHA makes homeownership accessible, especially if they are first-time homebuyers.
The Federal Housing Agency lets borrowers come in with just about 3.5 percent of the purchase price. The difference between an FHA and the above conventional option is borrowing requirements. FHA applicants will face more lenient borrowing terms, such as modest credit score requirements.
FHA, however, is not a direct lender. Borrowers therefore must pay an upfront and annual mortgage insurance premium that protects the lender in the event of a default.
As interest rates creep up, some borrowers can opt for an adjustable-rate mortgage, which features a fixed rate for an initial period of time.
Once the period sunsets, the rate will fluctuate based on current market trends. There’s a risk of having to pay a high monthly bill once the rate resets. Some products, however, have a cap on how high the monthly mortgage can go.
Conforming and non-conforming
The federal government sets maximum loan limits based on location that bound conforming loans. The Federal Housing Finance Agency will make exceptions for high-cost areas.
A loan that does not remain within these bounds is a nonconforming loan, which cannot be serviced by Fannie Mae and Freddie Mac.
Non-conforming loans are known as jumbo loans because they exceed the federal lending cap. To qualify for a jumbo loan, borrowers must typically have a lot of cash on hand to absorb the large down payment requirement.
Like an FHA loan, a VA loan is designed to clear an easy path toward homeownership for the nation’s service members, past and present.
Borrowers do not need to make a down payment and they can enjoy 100 percent financing. As a bonus, they may also incur fewer closing costs, excellent interest rates and can skip the private mortgage insurance.
If you have any further questions about these loan programs, contact us today!