A non-confirming mortgage is mortgage that does not meet the guidelines of government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac and, therefore, cannot be sold to them. GSE guidelines consist of a maximum loan amount, suitable properties, down payment requirements, and credit requirements, among other factors.
Conventional mortgages are the most common type of mortgage. A conventional mortgage loan is a “conforming” loan, which simply means that it meets the requirements for Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages from lenders and sell them to investors. This frees up lenders’ funds so they can get more qualified buyers into homes.
It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%. However, the down payment requirement can vary based on your personal situation and the type of loan or property you’re getting:
If you’re refinancing a conventional loan, you’ll need more than 3% equity. In all cases, you’ll need at least 5% equity. If you’re doing a cash-out refinance, you’ll need to leave at least 20% equity in the home.
If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI). PMI protects your mortgage investors in case you default on your loan. The cost for PMI varies based on your loan type, your credit score, and the size of your down payment. PMI is usually paid as part of your monthly mortgage payment, but there are several other ways to cover the cost as well. Some buyers pay it as an upfront fee included in their closing costs. Others pay it in the form of a slightly higher interest rate. Choosing how to pay for PMI is a matter of running the numbers to figure out which option is the cheapest for you. The nice thing about PMI is that it won’t be part of your loan forever – that is, you won’t have to refinance to get rid of it. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments.
If you reach 20% equity because of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement. Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.
Government-backed loans are insured by government agencies. When lenders talk about government-backed loans, they’re referring to three types of loans: FHA, VA, and USDA loans. These loans are less risky for lenders because the government foots the bill if you default on your mortgage. You may qualify for a government-backed loan, even if you can’t get a conventional loan.
Each government-backed loan has specific criteria you need to meet to qualify along with unique benefits. You may be able to save on interest or down payment requirements, depending on your eligibility. You should always compare government programs with conventional programs side-by-side so you can determine which program is a better fit for you.
To promote home ownership, the Federal Housing Administration (FHA) offers FHA loans, which have been helping people become homeowners since 1934. With less stringent guidelines than other loan programs, lenders can issue loans on mortgages that wouldn’t normally fit conventional underwriting requirements, allowing more people to become homeowners.
Although a high credit score may assist in getting the mortgage approved, a low score is not automatically cause for denial. If the credit scores are low, then it is up to the borrower to demonstrate his/her ability and willingness to pay the loan back. This allows the borrower to explain the circumstances surrounding the credit difficulties and have that explanation considered in the underwriting process.
Because of FHA’s leniency, some borrowers with past credit problems elect to use FHA for loans when they have a substantial down payment rather than getting a higher interest rate conventional loan. FHA tends to be more flexible than Conventional financing in the money needed to purchase the home.
In an FHA mortgage the customer must put at least 3% of the sales price into the transaction. Some of this money may be used for down payment and the rest for closing costs. Keep in mind, however, that the total cost to close on an FHA is commonly over 3%. With the down payment, closing costs, money to establish escrows for taxes and insurance plus interest to finish out the month of closing, the total costs can be closer to 6 or 8% of the sales price.
The interest rate that you select will also have a bearing on the total costs. If you select a lower rate so that you can reduce your payment, you may end up paying additional money towards “points”. At the same time if you are comfortable with a slightly higher payment, you may find a lender that is willing to reduce the costs to close in favor of a higher interest rate.
FHA allows the borrower to get the funds necessary to close from several sources. They include such areas as personal savings, gifts, grants, loans from retirement accounts and seller contributions.
The USDA changed its rules in 2009 making millions of Americans eligible for its rural mortgage programs. The American dream of home ownership has become more difficult as families struggle to come up with the 20% down payment that many conventional home loans require. With the USDA loan, many are still able to get a zero down home loan.
Eligibility varies based on area, your income, credit history, and number of dependents claimed so it’s important that you call and speak with one of our experts to see if you qualify.
VA loans are loans guaranteed by the Department of Veterans Affairs (VA). These loans were established to provide transition assistance and other benefits to men and women who served or are serving in the Armed Forces of the Nation. This includes the Army, Navy, Air Force, Marines, Reservists, National Guardsmen, and certain surviving spouses. Also, if you are a disabled veteran, you may qualify for additional benefits on a VA home mortgage loan.
A VA loan can be used to buy a home, build a home and even improve a home with energy-saving features such as solar or heating/cooling systems, water heaters, insulation, and other energy efficient improvements approved by the lender and VA.
Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program. A Certificate of Eligibility from the VA must be presented to the lender to qualify for the loan.
The Veterans Administration offers excellent qualifying standards. The VA does not use credit scoring in their analysis of the loan. Even if you have experienced some financial difficulties in your life that caused your scores to be low but have maintained a good payment record over the past year or so, you may qualify for a VA mortgage loan. This can be a tremendous savings compared to the cost of conventional loans when the borrower’s credit scores are low.
VA mortgage loans have built-in features that allow the loan to be refinanced to a lower interest rate without all of the criteria normally associated with a conventional loan. This is called an Interest Rate Reduction Loan (or VA Streamline); the veteran can secure a lower interest rate without any credit checks, appraisal, and income or asset verification and can roll the costs of the transaction into the loan so there are no out of pocket costs.
VA loans are also assumable. If the person assuming the mortgage is a veteran with VA eligibility, the original veteran will not be giving up the amount of eligibility that they used to get the loan at the beginning. Veterans should use great care and closely investigate the terms of an assumption before allowing someone to assume their mortgage. It is too great a benefit to give up.
Although mortgage insurance is not required, the VA charges a funding fee to issue a guarantee to a lender against borrower default on a mortgage. The fee may be paid in cash by the buyer or seller, or it may be financed in the loan amount.
The main advantage of a fixed rate mortgage, as opposed to an ARM, is that the borrower will never have to pay more than the specified monthly payment – regardless of sudden and potentially significant rises in interest rates. Additionally, having a fixed rate allows borrowers to budget more easily.
Fixed rate mortgages can vary in duration; however, the two most common are 30-year mortgages and 15-year mortgages. Below are some considerations when deciding between the two.
The main advantage of an ARM is that it tends to give the borrower a lower interest rate initially than a fixed-rate mortgage. ARMs have an introductory interest rate that lasts a set period and adjusts annually thereafter for the remaining term of the loan. The set rate for ARM loans can last for 3, 5, 7, and 10 years. For example, a 3-year ARM loan is a loan with a fixed rate for the first three years and then the rate changes once each year for the remaining life of the loan.
This type of loan is best for borrowers who plan to sell their home or refinance before the initial lock expires.
The details of a particular ARM, which is called the interest rate cap structure, tell you just how high your monthly payment could go. For example, a 5/1 ARM might have a cap structure of 2-2-6, meaning that in year six (after the introductory period expires) the interest rate can increase by 2%, in subsequent years the interest rate can increase by an additional 2%, and the total interest rate can never increase by more than 6%. Thus, if your introductory rate was 3.5%, your ARM would never adjust higher than 9.5%.
Unfortunately, the financial industry is forever fluctuating. Rates and payments have the potential to rise significantly over the life of the loan. ARMs can be risky if property values go down and borrowers can’t sell or refinance.
On certain ARMs, called negative amortization loans, borrowers can end up owing more money than they did at closing. That’s because the payments on these loans are set so low (to make the loans even more affordable) that they cover only part of the interest due. The remainder gets rolled into the principal balance.
A conforming loan refers to a conventional mortgage that can be purchased by Fannie Mae or Freddie Mac. For one of these institutions to purchase the mortgage from your lender, the loan must meet basic qualifications set by the Federal Housing Finance Agency (FHFA). These loan requirements include the following:
If your loan doesn’t meet conforming standards, it’s considered a non-conforming loan. Non-conforming loans have less strict guidelines than conforming loans. These loans can allow you to borrow with a lower credit score, take out a larger loan or get a loan with no money down.
Jersey Mortgage Guy is the best mortgage company to work for. You may even be able to get a non-conforming loan if you have a negative item on your credit report, like a bankruptcy. Most non-conforming loans will be government-backed loans or jumbo mortgages.
Conventional mortgages are the most common type of mortgage. That said, conventional loans do have stricter regulations on your credit score and your debt-to-income (DTI) ratio.
However, a down payment of less than 20% means you’ll need to pay for PMI. Mortgage insurance rates are usually lower for conventional loans than other types of loans (like FHA loans).
Conventional loans are a good choice for most borrowers who want to take advantage of lower interest rates with a larger down payment. If you can’t provide at least 3% down and you’re eligible, you could consider a USDA loan or a VA loan.
A fixed-rate best mortgage lenders in NJ has the same interest rate and principal/interest payment throughout the duration of the loan. The amount you pay per month may fluctuate due to changes in property tax and insurance rates, but for the most part, fixed-rate mortgages offer you a very predictable monthly payment.
You may want to avoid fixed-rate mortgages if interest rates in your area are high. Once you lock in, you’re stuck with your interest rate for the duration of your mortgage unless you refinance. If rates are high and you lock in, you could overpay thousands of dollars in interest. Speak to a local real estate agent or Home Loan Expert to learn more about how market interest rates are trending.
The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). ARMs are 30-year loans with interest rates that change depending on how market rates move.
You first agree to an introductory period of fixed interest when you sign onto an ARM. Your introductory period is typically 5, 7 or 10 years. If you sign on for a 5/1 ARM loan, for example, you’ll have a fixed interest rate for the first 5 years. During this introductory period, you pay a fixed interest rate that’s usually lower than 30-year fixed rates.
After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to calculate how rates are changing. Your rate will go up if the index’s market rates go up. If they go down, your rate goes down.
ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For instance, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.
Adjustable-rate loans can be a good choice if you plan to buy a starter home before moving to your forever home. You can easily take advantage and save money if you don’t plan to live in your home throughout the loan’s full term.
Government-backed loans are insured by government agencies. When lenders talk about government-backed loans, they’re referring to three types of loans: FHA, VA and USDA loans. These loans are less risky for lenders because the insuring body foots the bill if you default on your mortgage. You may qualify for a government-backed loan if you can’t get a conventional loan.
Each government-backed loan has specific criteria you need to meet in order to qualify along with unique benefits, but you may be able to save on interest or down payment requirements, depending on your eligibility.
A jumbo loan is one that’s worth more than conforming loan standards in your area. You usually need a jumbo loan if you want to buy a high-value property. For example, you can get up to $2.5 million in a jumbo loan if you choose Rocket Mortgage. The conforming loan limit in most parts of the country is $647,200.
Jumbo loan interest rates are usually similar to conforming interest rates, but they’re more difficult to qualify for than other types of loans. You’ll need to have a higher credit score and a lower DTI to qualify for a jumbo loan.
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