homebuyers may think they need perfect credit and a substantial down payment to qualify for a mortgage loan, but that is no longer true – there are various loan products to suit almost every buyer’s situation.
Conventional conforming loans are often sold to Fannie Mae and Freddie Mac and must meet federally established guidelines regarding income, debt, loan size and loan types.
Conventional Loans
Conventional loans do not carry government support and, thus, carry higher risk for lenders. Because of this risk factor, conventional mortgages typically require higher credit scores and larger down payments compared to government-backed loan options.
Lenders typically require a minimum debt-to-income (DTI) ratio, while conventional mortgages with less than 20% down payment require PMI insurance, which increases monthly payments until equity builds up or you make 20% down payment. Once equity builds up or there is 20% down payment you may be exempt from paying this fee.
Shopping around and getting personalized rates is essential, since published average rates often assume you’re an ideal borrower whereas your circumstances could differ substantially from this idealized image. NerdWallet’s mortgage calculator can help you estimate what your rate and payment might be while our comparison tool lets you explore options available from multiple lenders.
Government-Backed Loans
Home buying can be an intimidating and confusing experience, particularly for first-time homeowners. One of the key decisions early on will be which mortgage loan product best meets your needs in order to purchase your new house.
Conventional loans are supported by two government-sponsored enterprises known as Fannie Mae and Freddie Mac that make up most of the mortgage market, according to certain guidelines set by the Federal Housing Finance Agency.
Government-guaranteed loans–like VA and USDA loans for veterans, and rural homebuyers–make homeownership accessible to populations who might otherwise not qualify for conventional mortgages. Because these mortgages are insured by the government in case of default, their risk is minimized for private lenders allowing them to offer more favorable terms to borrowers.
Portfolio Loans
Portfolio loans are mortgages held on lender books instead of selling to Fannie Mae or Freddie Mac on the secondary market, which buy most traditional mortgages. Because these mortgages don’t face as stringent standards than conventional ones do, portfolio loans may allow borrowers who wouldn’t otherwise qualify to obtain financing.
Real estate investors and self-employed individuals with irregular incomes who might otherwise be disqualified due to lender requirements like minimum credit scores and debt-to-income ratios are likely to take advantage of portfolio loans; however, lenders offering them may charge higher interest rates and fees due to the greater risk they present for lenders.
15-Year Loans
No matter if you are purchasing or refinancing, choosing the ideal home loan can have significant financial benefits. Staying abreast of mortgage rate fluctuations daily or weekly can ensure you remain informed as to what should be expected when it’s time to close.
Conventional 15-year loans offer fixed mortgage rates at shorter terms lengths than their 30-year counterparts, without government backing or protection; PMI (private mortgage insurance) may be required if your credit score falls below 700.
If you choose a 15-year loan, keep in mind that higher monthly payments could have an adverse impact on your debt-to-income ratio and limit your ability to save for other goals or create an emergency financial cushion. Most lenders expect total housing and living expenses not exceeding 43% to 50% of monthly income.
Adjustable-Rate Mortgages (ARMs)
ARMs typically begin with an introductory fixed-rate period that’s often lower than conventional mortgage rates; after which your rate may change according to market conditions and monthly payments may rise significantly.
Your adjustable-rate mortgage (ARM) could contain both an index figure and margin; lenders typically charge extra when adding this additional amount onto your index number. A 7/1 ARM, for instance, features a fixed rate for seven years before changing annually thereafter.
Arms-length mortgages (ARMs) can be an excellent solution for borrowers who plan to remain in their homes only temporarily or those looking for investment properties, providing greater borrowing power than traditional fixed-rate loans.
