First-time homebuyers can choose from different types of loans; some are especially helpful for first-time buyers. These loans include more flexible criteria, such as down payment and lower credit score requirements. Learn about the differences between all your loan options before committing to a mortgage.
Read on for a brief overview of the different types of mortgages you can choose from as a first-time homebuyer.
Type 1 Loan: Conforming Loans
Conforming loans meet basic Fannie Mae or Freddie Mac qualifications for purchase. Let’s take a closer look at what that means for you as a borrower.
Your lender has two options when you sign for a home loan. Your lender can keep your loan and collect the payments and interest, or they can sell it to Fannie or Freddie. Fannie and Freddie are real estate investment companies that buy mortgages after closing. Most lenders sell loans a few months after completing to ensure they have the steady cash flow to offer more loans.
The Federal Housing Finance Agency sets the rules for the loans that Fannie and Freddie can buy. Your loan must meet some essential criteria to qualify for purchase standards. First, your loan must be below the maximum dollar limit for your area. In 2022, in most of the contiguous United States, the total amount for a conforming loan is $647,200. In Alaska, Hawaii, and some expensive counties, the limit is $970,800. Higher limitations also apply if you purchase a multi-family home. Your lender can’t sell your loan to Freddie, and you can’t get a conforming mortgage if your loan exceeds the maximum amount. If you exceed these limitations, you will need to take out a jumbo loan to finance your home purchase.
A federal government agency cannot back the loan. Some government agencies (including the US Department of Agriculture and the Federal Housing Administration) offer mortgage loan insurance. Fannie and Freddie can’t buy your mortgage if you have a government-backed loan. When you hear a lender talk about a “conforming loan,” they are referring only to a conventional mortgage.
You must also meet your lender’s specific criteria to qualify for a conforming mortgage. For a sample, you must be eligible for a credit score of at least 620. When applying for a conforming loan, you may also consider property guidelines and income restrictions. A home loan expert can help you determine if you qualify based on your unique financial situation.
Conforming loans have well-defined guidelines and less variation in who qualifies for a loan. This means you can get a lower interest rate when you choose a conforming loan. Since the lender can sell the loan to Fannie or Freddie, conforming loans also carry less risk than jumbo loans.
Conventional mortgage loans are the most common type of mortgage. A conventional loan is a conforming loan financed by private financial lenders. Lons This is because they do not have strict regulations on income requirements and the type and location of housing, like other types of loans. That said, conventional loans have more stringent rules on your credit score and debt-to-income (DTI) ratio.
You can buy a home with as little as a 3% down payment with a conventional mortgage. You’ll also need a minimum credit score of at least 620 to be good for a traditional loan. You can opt out of private mortgage insurance (PMI) if you make a down payment of at least 20%. However, you will need to pay PMI if the down payment is less than 20%. Mortgage insurance rates are generally lower for conventional loans than other types of loans (such as FHA).
Conventional loans are a good option for most consumers who don’t qualify for a government-backed loan or want to take advantage of lower interest rates with a larger down payment. If you can’t make a minimum 3% down payment and are eligible, you might consider a USDA or VA loan.
A fixed-rate mortgage has the same interest rate throughout the loan. The amount you pay each month can fluctuate due to changes in local tax and insurance rates, but fixed-rate mortgages often offer a highly predictable monthly payment.
It may be a better option if you live in your “ultimate home.” A fixed interest rate gives you a brilliant idea of how much you’ll pay monthly for your mortgage, which can help you budget and plan for the long term.
You might be better off avoiding fixed-rate mortgages if rates are high in your area. If rates are high and you lock in a rate, you could pay thousands of dollars in excess interest. Once it’s set, your interest rate won’t change for the entire mortgage unless you refinance. Talk to a local real estate agent or home loan expert to learn more about market interest rate trends in your area.
The opposite of a fixed-rate mortgage is an ARM (Adjustable-Rate Mortgage). ARMs are 30-year loans with interest rates that change based on how market rates move.
When you sign an ARM, you agree to an initial period with a fixed interest rate. Your initial period can last between 5 and 10 years. During this period, you will pay a fixed interest rate that is generally lower than market rates. After the initial period ends, the interest rate changes based on market interest rates. Your lender will use a predetermined index to set rate changes. Your rate will increase if index market rates go up. If they go down, your rate will go down.
ARMs include rate caps that set how much your interest rate can change in a given period and over the life of your loan. Rate caps protect you from rapidly rising interest rates. For example, interest rates might continue to rise each year, but when your loan reaches its maximum rate, it won’t go any higher. On the other hand, rate caps also limit the amount you can lower your interest rate.
ARMs can be a good option if you plan to purchase your first home before moving into your permanent home. They give you access to below-market rates for an initial period. You can easily take advantage of saving money if you don’t plan to live in your home for the entire term of the loan.
They can also be very useful if you plan to pay more for your loan at the beginning. ARMs start with lower interest rates than fixed-rate loans, which can give you a little more money to pay down the principal. Paying more for your loan upfront can save you thousands of dollars later.
Type 2 Loan: Non-Conforming Loans
Your loan is non-conforming if it doesn’t meet compliance standards. Nonconforming loans have less stringent guidelines than conforming loans. With these, you can borrow money with a lower credit score or get a larger loan or no down payment. You can even get a non-conforming loan if you have a negative item on your credit report, like a bankruptcy.
There are two main types of nonconforming loans: government-backed loans and jumbo loans.
Government-backed loans are insured by government agencies. When lenders talk about government-backed loans, they refer to three types of loans: FHA, VA, and USDA. These loans are less risky for lenders because the insurance agency takes over the payment in case of default. You may have a better chance of getting a government-backed loan if a conventional loan is not available to you.
Each loan has specific criteria you must meet to qualify, and each has unique benefits. Let’s break down each of the three types of government-backed loans:
- FHA Loans: Federal Housing Administration (FHA) loans are insured by the Federal Housing Administration. With an FHA loan, you can buy a home with a credit score as low as 580 and a 3.5% down payment. Instead, with a 10% down payment, you can buy a home with a credit score as low as 500 with an FHA loan.
- USDA Loans: U.S. Department of Agriculture (USDA) loans are insured by the United States Department of Agriculture. They have less mortgage insurance requirements than FHA loans and may allow you to purchase a home without a down payment . You must meet income requirements and purchase a home in a suburban or rural area to qualify for a USDA loan.
- VA Loans: VA loans are insured by the Department of Veterans Affairs. With a VA loan, you can buy a home with no down payment and lower interest rates than most other types of loans. You must meet military or National Guard service requirements to qualify for a VA loan.
You may be able to save on interest or down payment requirements if you qualify for a government-backed loan. Make sure you meet the loan requirements before you apply.
A jumbo loan is a loan of higher value than standard conforming loans in your area. In general, you will need a jumbo loan if you want to buy a high-value property. For example, you can get up to $3,000,000 in a jumbo loan if you choose Priva Mortgage. In most parts of the country, the limit for conforming loans is $484,350. In 2020, the limit will increase to $510,400.
The good news is that interest rates on jumbo loans are often similar to interest rates on conforming loans. The bad news is that jumbo loans are more difficult to qualify for than other types of loans. You will need to have a higher credit score and lower DTI to qualify for a jumbo loan.
The best type of loan for first-time homebuyers
So what is the best type of loan for first-time homebuyers? The answer depends on your preferences and your particular situation. Your credit score, income, debt, and property location influence the type of loan you can get. Rocket Mortgage ® and our team of home loan experts can help you with a personalised solution.
First-time homebuyers have access to a wide variety of loan types. The most common type of mortgage is a conforming conventional loan. A conforming loan means that it meets the basic purchase qualifications of mortgage. Conforming loans have standardised criteria and low-interest rates than some other types of loans. You can choose a fixed-rate mortgage so the rate stays the same or an adjustable-rate mortgage. The interest rates of the last change according to the variation of market rates.
Nonconforming loans include government-backed loans and jumbo loans. Government-backed loans have more stringent qualifying criteria but also more flexible credit scores and down payment requirements. Jumbo loans are high-value loans that exceed the loan limits set by Fannie or Freddie. Priva Mortgage and our home loan experts can help you compare mortgage solutions and determine the best option for you.