If you are ready to buy a house, congratulations. You are one step closer to doing what is probably the biggest single purchase of your life, at least until your family grows and you are forced to become a more spacious home.
Whether you are buying a new construction home or an old repair home, it is very likely that you do not have enough cash to buy your home. You will have to finance the purchase with a mortgage loan.
Similarly, if you bought your home when interest rates were higher, but you do not have enough cash to pay off your mortgage in full, you may be ready to refinance your purchase loan. That means taking out a new mortgage loan to pay off your existing loan and securing a lower interest rate that saves you thousands (and maybe tens or even hundreds of thousands) for the remainder of your loan term.
Types of conventional loans
Conventional mortgage loans come in different configurations. Unless stated otherwise, these types of loans can be used to buy or refinance:
Fixed rate: interest rates for fixed rate loans are fixed for the entire term of the loan. The terms of the fixed rate loans vary from 10 to 40 years, although the terms at 15 and 30 years are more common. In most cases, longer-term loans have higher interest rates; For example, at the beginning of 2018, 30-year APRs were almost 1 percentage point higher than 10-year APRs for borrowers with excellent credit. The best rates are reserved for top-level borrowers, those with FICO scores above 740.
Adjustable rate: interest rates on adjustable rate loans (ARMs) remain fixed for a defined initial period. At the end of this period, they adjust up and then change annually or twice a year with the current interest rates (with LIBOR or another standard widely accepted as a benchmark).
Most ARMs have periodic and lifetime interest rate increase limits, typically 1 to 2 percentage points per year and 5 to 6 percentage points during the life of the loan, which means that an ARM with a rate Initial 4% could increase only 5% or 6% in a single year and 9% to 10% in its entire term. The initial terms can be as short as 1 year and up to 10 years. All things being equal, the initial ARM APRs are significantly lower than the fixed rate APRs, although they invariably exceed the prevailing fixed rate APRs. Some ARMs are convertible, which means they can be converted into fixed rate loans under certain circumstances.
ARM with interests only: ARMs with interest are structured only as traditional ARMs, with one important difference: during an initial period, the borrower only pays interest on the loan balance. This substantially reduces payments from the beginning, but hinders the creation of capital and does not reduce the capital of the loan. After the initial period, the loan is amortized and the borrower is responsible for the payment of principal and interest.
The transition from interest payments only to principal and interest can be discordant, so borrowers must confirm that they can pay future principal and interest payments before obtaining interest-only BRAs. Interest-only ARMs are often suitable for buyers who expect to sell their homes in the short or medium term, before the principal and interest payments come in and the rates adjust upwards. However, some ARMs (including interest only) incur early payment penalties that apply when they are canceled in full within a predetermined time period.
Types of mortgage loans: compliant and non-compliant
Purchase and refinance loans come in many different configurations. Before making an offer in a house or committing to refinance your current mortgage, you should evaluate your options and choose the one that best suits your needs.
Mortgage loans can be divided into two main categories: conventional and unconventional. Sometimes, you can also see references to “compliant” and “non-conforming” loans. These terms are not synonymous, but sometimes they are used interchangeably.
Conventional loans vs. unconventional: key differences
The most important distinction between conventional and unconventional loans is that conventional loans are not issued or backed by a federal government agency. Conversely, unconventional loans are issued or supported by departments of the executive branch, including the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA, part of the Department of Housing and Urban Development) and the Department. of Agriculture. (USDA).
According to the loan requirements
Most conventional loans are adjusted, which means they must meet the limits set by the Federal Federal Mortgage Association (Fannie Mae) and the Federal Mortgage Loan Corporation (Freddie Mac), two quasi-governmental companies that have tremendous influence about US low rate mortgage loans. industry. Fannie Mae and Freddie Mac guarantee loans that meet these limits, guaranteeing a liquid secondary market for residential mortgage debt.
Loan size limits
To qualify as a conforming loan, the loan capital can not exceed a fixed maximum that is adjusted upwards each year to reflect market conditions. In 2017, the limit was approximately $ 424,000 for single-family homes in the US. UU Continental and approximately $ 625,000 in high-cost areas (including Alaska, Hawaii and expensive coastal cities such as Seattle and San Francisco).
Loans not backed by the government with larger directors are known as jumbo loans. Jumbo loans are not guaranteed by Fannie and Freddie, so the secondary market for them is smaller and riskier.
Eligible property types
Eligible property types include separate homes with one to four families, condominiums, newly built homes in planned developments, cooperative housing, and prefabricated homes. However, condominiums, cooperative houses and prefabricated homes are subject to some additional restrictions.
Credit and debt requirements
In most cases, conforming loans are reserved for borrowers with good to excellent credit. It is rare for borrowers with FICO scores below 680 to qualify for conforming loans, although lenders have some discretion to make exceptions. The preferential rates are reserved for owners with excellent credit.
In addition, most lenders require that applicants for conforming loans have a debt / income ratio (DTI) below 43%. Some lenders are stricter and require rates below 36%. However, in some cases, DTI ratios may rise above 50%, although interest rates on high DTI loans are likely to be higher. Your ratio of debt to income is defined as the proportion (percentage) of your monthly income spent on debt service, including unsecured credit products, such as credit cards and guaranteed credit products, such as car notes.
In the following sections, we will delve into the relationship between conventional mortgage loans, FHA mortgage loans and VA mortgage loans.