Home Financing 101: Pt. 1

Home buying is an exciting chapter in anyone’s life but the financing side of it all can be intimidating and overwhelming. 

When you start the journey, you need to make sure you put as much energy into researching mortgage loans as you do the neighborhoods that you want to live in. The number of mortgage loans that exist make it that much more important to understand each type and the advantages/disadvantages of each type. 

Let’s talk about the requirements that will influence what type of loan you could qualify for…

- Estimated Down Payment: Your down payment can impact the mortgage rate lenders may give you.

- Monthly Mortgage Payment: Mortgage lenders will look at your income and assets to determine the total loan amount you can afford to pay back. (Rocket Mortgage) When you are calculating your budget, make sure to consider the principal amount, interest/taxes, mortgage insurance, utilities and homeowners fees.

- Credit Score: Your credit score will play the biggest role in determining your interest rate.

When you spend the time researching the types of mortgage loans, you will be able to choose the right mortgage for you. This can, in turn, potentially lower your down payment and decrease the overall interest payment over the life of your loan. 

All mortgages are considered either conforming or non-conforming. These loans are determined by whether or not your lender will collect payments and interest on it or they sell it off. 

A conforming loan is considered a conventional mortgage only and is one that can be purchased from one of two real estate investment companies - Fannie Mae or Freddie Mac.  For one of these companies to be able to purchase the mortgage from your lender, your loan must meet basic qualifications set by the Federal Housing Finance Agency (FHFA). 

The basic qualifications include: 

- Loans below the maximum dollar limit: The maximum dollar limit in most parts of the contiguous United States is $548,250 in 2021. Your lender cannot sell your mortgage or get you a conforming mortgage loan if your loan is over the maximum amount. 

- Loans that are not backed by the Federal Government:  The loan cannot be FHA, USDA or VA. 

- Loans that meet specific lender criteria:  Your loan must meet your lender’s criteria, make sure you understand their requirements up front. 

Conforming loans have very defined guidelines and there is less variation in who qualifies for these loans. 

Non-conforming loans have less strict guidelines.  These loans can help homebuyers who have lower credit scores, need to take out larger loans or need to get a loan with no money down to borrow.  Most non-conforming loans will likely be government backed. 

In our next blog, we will talk about Conforming Loans!  We are going to break down each type of loan that home buyers qualify for and what the pros/cons of each are.

Keep reading Part 2 HERE!

Interest rates, loan requirements and credit scores can vary. For more information on which loans may be right for you please reach out to a local lender.   

Information for this blog came from: 

Rocket Mortgage - www.rocketmortgage.com
https://www.rocketmortgage.com/learn/types-of-mortgages

Bank Rate - www.bankrate.com
https://www.bankrate.com/mortgages/types-of-mortgages