Navigating the home buying market requires jumping through several hoops. Viewing homes and choosing that one special property is only half the battle. Getting your dream home ultimately comes down to one thing: financing.
Throughout the buyer series, we’ve discussion the importance of debt-to-income ratio and how that can affect the amount of money you are approved to borrow along with several terms related to the loan and mortgage aspects of buying a home. You know you need to borrow money for your purchase, but where do you even start? The first step is understanding the types of loans that are available and then making them work for you.
Conventional loans are loans given from mortgage lending institutions that are not backed by an agency of the government. Conventional loans can be conforming (the loan conforms to guidelines set forth by Fannie Mae and Freddie Mac) or non-conforming (the loan does not conform to the guidelines or standards of Fannie Mae or Freddie Mac).
Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corporation, were created by Congress. Fannie Mae and Freddie Mac buy mortgages from lenders to hold in their portfolios or package the loans into mortgage-backed securities (MBS). This can help stabilize mortgage markets which is important in the event of a housing crisis or financial downturn.
In addition to conforming and non-conforming loans, conventional loans can also be jumbo loans, portfolio loans, and sub-prime loans.
Federal Housing Association (FHA) loans are government-backed loans. The FHA is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans can provide lower down payments (versus conventional loans), lower closing cost, and easier credit qualifying. Also, since these loans are government-backed, it means they can offer more incentives for first-time home buyers, seniors, and those with lower credit.
However, while the FHA loans offer more “incentives” than conventional loans, the government has several eligibility requirements for those looking to qualify for a FHA loan. These requirements include things such as a minimum credit score of 580, a buyer must be two years out of bankruptcy or three years out of foreclosure (if applicable), new FHA loans are only available for primary residence occupancy, and property appraisals must be completed by a FHA-approve appraiser.
Financing is the most complicated piece of purchasing a home. Since it can make or break your deal, we recommend contacting a reliable and reputable lender to help you identify what loan will best fit your needs. While real estate agents can provide some information, a lender is really the only one who should advise on your financial situation. Over the last ten years, we’ve worked with our fair share of lenders and clients in getting deals done. This is only a brief overview of two loan types. We’ll be covering other loan types in future posts, so we hope you follow along. If you need help finding a lender, or additional questions on loans and what you need, give us a call or leave a comment and we’ll get to work for you!