Buying a home is exciting, but figuring out the financing side of things can feel overwhelming. Chin up: Choosing a mortgage isn’t all that painful if you know the lingo. Once you’ve done some homework and nailed down a budget and down payment amount, and you’ve reviewed your credit, you’ll have a better idea of what loan works best for your needs.
Here’s a primer on some of the most common types of mortgages.
5 types of mortgage loans:
A conventional mortgage is a home loan that’s not insured by the federal government. There are two types of conventional loans: conforming and non-conforming loans.
A conforming loan simply means the loan amount falls within maximum limits set by Fannie Mae or Freddie Mac, government agencies that back most U.S. mortgages. On the other hand, loans that don’t meet these guidelines are considered non-conforming loans. Jumbo loans are the most common type of non-conforming loan.
Generally, lenders require you to pay private mortgage insurance on many conventional loans when you put down less than 20 percent of the home’s purchase price.
Pros of conventional mortgages
- Can be used for a primary home, second home or investment property.
- Overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher.
- You can ask your lender to cancel PMI once you’ve gained 20 percent equity.
- You can pay as little as 3 percent down for loans backed by Fannie Mae or Freddie Mac.
Cons of conventional mortgages
- Minimum FICO score of 620 or higher is required.
- You must have a debt-to-income ratio of 45 to 50 percent.
- Likely must pay PMI if your down payment is less than 20 percent of the sales price.
- Significant documentation required to verify income, assets, down payment and employment.
Who should get one?
Conventional loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.
Jumbo mortgages are conventional loans that have non-conforming loan limits. This means the home prices exceed federal loan limits. For 2018, the maximum conforming loan limit for single-family homes in most of the U.S. is $453,100, according to the Federal Housing Finance Agency. In certain high-cost areas, the price ceiling is $679,650. Jumbo loans are more common in higher-cost areas and generally require more in-depth documentation to qualify.
- You can borrow more money to buy a home in an expensive area.
- Interest rates tend to be competitive with other conventional loans.
Cons of jumbo mortgages
- Down payment of at least 10 to 20 percent is needed.
- A FICO score of 700 or higher typically is required, although some lenders will accept a minimum score of 660.
- You cannot have a debt-to-income ratio above 45 percent.
- Must show you have significant assets (10 percent of the loan amount) in cash or savings accounts.
Who should get one?
Jumbo loans make sense for more affluent buyers purchasing a high-end home. Jumbo borrowers should…