Mortgages 101

Buying a home is a complicated process. When it comes to figuring out how you are going to finance your new home, the options can seem overwhelming. There is financing that applies to first-time buyers, buyers with large down payments, buyers with no down payments, buyers with good credit, buyers with bad credit, and everything in between. To help you sort through all your options, we have put together a crash course of mortgage terminologies to help you narrow down what is best for you.

There are three major categories that loans can fall into when you are looking to buy a home:

• Fixed rate vs. Adjustable Rate
• Government-Insured vs. Conventional
• Jumbo vs. Conforming

Let’s dive into the first category –

Fixed Rate – A fixed rate loan means that you have locked in your interest rate for the entire repayment term. Whether you have opted for a 15 or 30-year mortgage, with a fixed rate loan, the interest will not fluctuate. This means that your payments will not vary in the same pay that an adjustable rate loan will.

Adjustable Rate – Also known as ARMs, have rates of interest that will change or adjust as time passes. For the most part, the first five years of an ARM are going to remain “fixed” but once that period expires, the rate will change annually. This makes for variable monthly payments year over year.

Both options have their high and low points. With an ARM, you can get a lower rate than a fixed initially, but over time the rate will be uncertain. With a fixed mortgage, you will have the security of an unvarying payment amount, but if interest rates drop, yours will still remain the same.

The next option to consider when finding the right mortgage, is a government-insured versus a conventional loan.

Conventional Loans – This can apply to any mortgage that is not insured by the government. If a borrower defaults on this mortgage, the lender is at risk of losing money so a conventional mortgage often has stricter qualifications. Borrowers need good credit, a substantial down payment, and steady income. Conventional loans can by fixed or adjustable rate loans but are almost always conforming, which we will learn more about later.

Government-Insured Loans – These loans are backed by the government as the name implies and are often less strenuous for buyers to qualify. The most common government-insured loans are FHA, VA, and USDA mortgages. With loans of this type, there are often specific income, down payment, or location requirements to qualify.

Government-insured loans allow for buyers to purchase with less or even no money down and often with less income but can have higher interest rates and take longer to be approved. With conventional loans, buyers can get the best interest rate available, do not have as many stipulations about how to qualify, but do have to be in good financial status in order to do so.

Finally, there are conforming loans versus jumbo loans. This is not a category that as many home buyers will encounter but if you are buying a large property, you will need to know the differences.

Conforming Loan – This type of loan meets the underwrite guidelines of Fannie Mae and Freddie Mac in regards to the size of the loan. There are maximum size limits to mortgages that can be sold under these guidelines and anything outside of that limit, is no longer considered a conforming loan. The guidelines vary by region. Conforming loans are easier to qualify for and require less down payment.

Jumbo Loans – A jumbo loan exceeds the established Fannie and Freddie limits, which represents a higher risk for lenders. Due to the size of these loans, buyers need higher credit scores, better debt to income ratios, and higher down payments. But, with a jumbo loan, you are able to qualify for more money allowing for a larger purchase than a conforming loan would typically allow.

It all boils down to your needs with a conforming or a jumbo loan. Jumbo loans may be trickier to qualify for but if you are purchasing a large property, it could be a better option for the amount of loan needed for the transaction. On the flip side, conforming loans are most common in the real estate market and easier to buyers to qualify for but might not offer the buying power that you need for a large purchase.

One of the most important things that a buyer can do when they are ready to purchase a home is set up a meeting with a reputable lender. Finding a house is the easy part. But if you don’t have all of your financial needs squared away before you make an offer, you are going to run into some trouble. It is best to sit down to discuss all the mortgage options available to you. You should also figure out how much house you can afford but it isn’t always the same amount for which you are qualified.

Speak with our loan officers today at Metro Brokers Financial to get started on the path to home ownership at 404.847.2525.