What is a mortage?
A mortage is an agreement between you and a lender. The agreement gives the lender the right to take your home if you fail to make your mortage payments. Mortage loans are used to buy a home or to borrow money against the value of a property you already own.
What is a mortage – In simple words?
A mortage is a loan simply put. This loan is provided by a mortage lender or a bank. Mortage loans can also be provided by private lenders. In all cases, the mortage loan that is provided allows an individual to purchase a home or investment property. In the US it is possible to take out a mortage to cover the entire cost of the home. However, it is more common to secure a mortage for about 80% of the home’s value. The mortage loan must be paid back over time.
3 types of mortage loans for homebuyers
There are so many types of mortage loans in the US. We are going to describe 3 of the most common ones that homebuyers get.
conventional mortage loan
A conventional mortage is a mortage that is not insured by the federal government. There are two types of conventional mortage loans. These are called conforming and non-conforming mortage loans.
A conforming mortage loan means that the loan amount falls within maximum limits set by the Federal Housing Finance Agency. Simply put the mortage is conforming to the rules. The types of mortage loans that don’t meet these rules are classified as non-conforming loans. Jumbo mortage loans which we will learn about shortly, are the most common type of non-conforming loan.
It is important to note that enders require you to pay private mortage insurance (PMI) on many conventional loans when you put provide a down payment of less than 20 percent of the home’s purchase price.
Pros of a conventional mortage
- This type of mortage may be used for a primary residence, secondary home or rental property
- Borrowing costs are lower versus other types of mortage loans, even if interest rates may be slightly higher
- Your lender can remove the PMI once you have got to 20 percent equity, or can refinance to remove it
- 3 percent down mortage loans available
Cons of a conventional mortage
- There is a higher down payment requirement versus government loans
- Debt to Income (DTI) ration has to be no more than 45 to 50 percent
- Lots of documentation is required in order to verify your information including, income, assets, down payment and employment.
- If your downpayment is less than 20 percent, you will need to pay PMI.
- You are subject to a minimum FICO score. The same rule applies for refinances. The minimum score is 620 or higher.
who should get this type of mortage?
Conventional mortage loans are most ideal for borrowers with strong credit. If you have stable income and good employment history, and if you have a down payment of at least 3 percent, you are good candidate for this type of mortage.
Jumbo mortage loan
A Jumbo mortage is conventional in nature but has non-conforming loan limits. What this means in simple terms is that the value of the home exceeds federal loan limits. Jumbo mortage loans are more common in higher-cost areas, such as more expensive cities and towns. Further, they generally require more detailed documentation in order to qualify.
pros of a jumbo mortage
- This type of mortage allows you to borrow more money to buy a home in an expensive area
- Interest rates are competitive (similar) to other conventional mortage loans
cons of a jumbo mortage
- You need at least 10% to 20% for your down payment
- A 700 or higher FICO score is required. However some lenders accept a minimum score of 660
- Likely will not get approved if DTI ratio is above 45 percent
- This is a big one. You have to show you have significant assets (usually 10 percent of the mortage loan amount) in cash or savings accounts
who should get a jumbo mortage?
Jumbo mortage loans are more appropriate for affluent buyers who are buying a home with a higher purchase price. Jumbo mortage borrowers will need to have excellent credit, a high income and a big down payment. Lots of lenders offer jumbo mortage loans at competitive rates. It is important to note that whether or not you need a jumbo mortage loan is determined by how much financing you need, not by the purchase price of the home.
government insured mortage loans
The U.S. government plays a very important role in helping Americans buy homes. The Government is not however an actual mortage lender. There are three government agencies that back mortgages. They are the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
fha mortage loans
FHA Mortage Loan – These types of mortage loans help make potential buyers get into the market who don’t have a large down payment saved up or don’t have very good credit. Purchasers will need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment. However, a score of 500 is accepted if the purchaser is putting down at least 10 percent down. These types of mortage loans require two mortgage insurance premiums. One of the premiums is paid upfront, and the other is paid annually for the life of the mortage if you put less than 10 percent down, which can increase the overall cost of your mortgage.
usda mortage loans
USDA mortage loans assist moderate to low income people purchase homes in rural areas of America. One of the major requirements is that you must purchase a home in a USDA eligible area and meet certain income limits to qualify. Some USDA mortage loans do not require a down payment for eligible borrowers with low incomes.
va mortage loans
A VA loan is a low-interest mortage for members of the U.S. military and their families. This type of mortage does not require a down payment or mortage insurance, and closing costs are generally capped. Sometimes the closing costs are paid by the seller of the property. A fee knowns as a funding fee is charged on a VA mortage loan as a percentage of the loan amount to help offset the program’s cost to taxpayers. This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing.
pros of government insured mortage loans
- If you don’t qualify for a conventional loan you can still get a mortage
- Credit requirements are much less strict
- You don’t need a big downpayment
- Available not only to first time home buyers but second and third time buyers as well
cons of government insured mortage loans
- There are mandatory mortgage insurance premiums on FHA loans that cannot be canceled
- You will likely have higher overall borrowing costs
- You will have to provide more documentation in order to get approved