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A new home can be one of the biggest purchases you will ever make. Before you start looking for the right home to buy, you need to review your mortgage options if you’re considering financing your purchase.
However, not all home loans are created equal. So, by doing your research before proceeding, you can choose the option that best suits your financial situation and potentially keep more money in your pocket. Also, you know what to expect in terms of policies when you apply.
Types of mortgages
Classic Credit: Ideal for borrowers with a good credit rating
Jumbo Loans: Best suited for borrowers with good credit who want to buy an expensive home
Government-backed loan: ideal for borrowers with poor credit ratings and minimal down payment
Fixed Rate Mortgage – Ideal for borrowers who prefer a fixed, predictable monthly payment over the life of the loan
Adjustable Rate Mortgage – Ideal for borrowers who don’t plan on staying home for long, prefer lower payments in the short term, and want to be comfortable paying more in the future.
1. Conventional loan
Traditional loans that are not guaranteed by the federal government come in two forms: conforming and non-conforming.
Compliant loan – As the name suggests, “compliant” means a loan that conforms to a set of standards set by the Federal Housing Finance Agency (FHFA), including credit, debt, and loan size. For 2023, compliant credit limits are $726,200 in most regions and $1,089,300 in high-cost regions.
Non-Compliant Loans – These loans do not comply with FHFA standards. Instead, they target borrowers looking to buy more expensive homes or people with unusual credit profiles.
Pros of conventional loans
Can be used as a primary residence, secondary residence, or apartment building
Overall borrowing costs tend to be lower than other types of mortgages, although interest rates are slightly higher
You can ask your lender to cancel Personal Mortgage Insurance (MPI) once you reach 20% of the principal balance, or refinance to eliminate it.
You can only repay 3% of loans backed by Fannie Mae or Freddie Mac
Sellers can contribute to closing costs
Cons of conventional loans
A minimum FICO score of 620 or higher is often required (same for refinancing)
Higher down payment than some government loans
Must have a debt-to-income ratio (DTI) of no more than 43% (50% in some cases).
You may have to pay PMI if your deposit is less than 20% of the sale price
Important documents to prove income, assets, deposit, and employment.
Who are conventional loans best for?
If you have good credit and can afford a large down payment, a conventional mortgage is probably your best option. The classic fixed-rate mortgage with a term of 30 years is the most popular option for homebuyers.
2. Jumbo loan
Giant mortgages are home loan products that are not covered by the FHFA loan limits. Jumbo loans are more common in higher-cost areas like Los Angeles, San Francisco, New York, and the state of Hawaii, where home prices are generally higher.
Pros of jumbo loans
You can borrow more money to buy a more expensive home
Interest rates on jumbo loans are typically competitive with other conventional loans
This may be the only way for some borrowers to access home ownership in areas with extremely high real estate values.
Cons of jumbo loans
In many cases, a deposit of at least 10-20% is required.
A FICO score of 700 or higher is usually required
Must not have a DTI ratio greater than 45%
You must show that you have significant assets in the form of cash or savings accounts
Usually requires more detailed documentation to qualify
Who are jumbo loans best for?
If you want to finance a home at a selling price that exceeds the latest compliant credit limits, a jumbo loan is probably the best way to go.