Homeownership is not for the faint of heart. Or the ill-prepared!
According to the Federal Housing Finance Agency (FHFA), house prices increased to the tune of 11% between November 2019 and November 2020. By all accounts, it’s a seller’s market out there.
As a buyer, it’s more critical than ever to do your homework. Don’t make a beginner’s mistake when you shop for conventional loans. Find the best mortgage for your investment by learning from experience.
Conventional Loans vs. Non-Conventional Loans
First, it is important to understand the different types of mortgages available. The landscape can get complicated, so you should start by understanding the two main mortgage loan types: conventional vs. non-conventional.
Conventional Loans
Conventional loans are mortgage loans that are not guaranteed or insured by the federal government. Conventional mortgages tend to be more popular than other types of home loans for a few significant reasons.
First, conventional loans tend to carry a lower interest rate. Over the past year, mortgage interest rates have been dramatically decreasing. The interest rate for a 30-year mortgage dipped to 2.65%, down from 3.64% last year. For a 15-year mortgage, the rate went from 3.07% in 2020 to 2.16% as of January 2021.
The excellent rate for conventional loans doesn’t come without some requirements, though. Generally, conventional loans require a higher credit score, 620 or higher. To qualify for a conventional loan, a borrower will also need a debt-to-income ratio of 50% or less.
Now enter Fannie Mae and Freddie Mac, publicly-traded entities that purchase mortgages and sell them to investors. (If you are either really young or just absent during the Fall of 2008, watch the movie The Big Short to see just how integral these two companies were to the historic housing crash.)
Fannie Mae and Freddie Mac have their own guidelines for purchasing mortgages, which adds another layer of classification to a conventional loan: “conforming” or “non-conforming.” Basically, if a conventional loan “conforms” to their purchase standards and loan amount, Freddie and Fannie will finance it.
Non-Conventional Loans
Non-conventional loans are virtually synonymous with government loans. Many first-time homebuyers opt for non-conventional loans because they are generally easier to enter into and come with more assistance.
For example, in contrast with a conventional loan, which requires a credit score of 620, you could qualify for a government-backed Federal Housing Administration (FHA) loan with a credit score of around 580. A typical rate for a non-conventional loan can hover in the 3.5% range.
To boot, if you come with a down payment of 10%, you may even be able to qualify for an even lower rate or possibly get away with a lower credit score. Either way, larger down payments tend to buy wriggle room in other areas.
The most popular government-backed mortgages are:
- Federal Housing Administration (FHA) Loans
- Veteran’s Administration (VA) Loans
- United States Department of Agriculture (USDA) Loans
Loans backed and insured by the FHA are the most popular type of non-conventional mortgage. Along with the more relaxed credit score requirement, there are a few other benefits of non-conventional loans.
In certain instances, such as with a VA or USDA loan, a home buyer could potentially qualify for a house with 0% down. Additionally, jumbo loans may be available to non-conventional borrowers, which allows for the purchase of expensive property (think $500k or more).
Government-backed mortgages also allow borrowers to purchase different property types, many of which they wouldn’t be able to finance through conventional loan methods. For example, non-conventional loans may allow you to purchase a spread of land on which to build a house.
VA and USDA Loans
VA loans are open to veterans, active military, and military spouses and generally carry the lowest interest rates. Along with the low rates, VA loans are legendary for their 0% down payment. In fact, nearly 90% of all VA home loans are given without a down payment.
Government-backed USDA loans are the least popular of the three major non-conventional loan types. While not as common as FHA or VA loans, USDA loans target themselves at low-income Americans seeking to purchase a home in a designated rural or suburban area.
With a USDA loan, applicants can qualify with a 640 credit score, and rates can dip to as low as 2% in some instances!
Not sure which loan type is right for you? That’s where we come in. Our seasoned lending professionals can walk you through your mortgage options. Conventional or non-conventional? FHA or VA? Let us guide you through the process so you can get some clarity on your choices.
Alternative Non-Conventional Loans
As a potential new homeowner, your research would not be complete without learning about some alternative mortgage financing methods. As fringe as some of these methods may seem, they’re around because many been people have experienced homebuying success using these “alternative to the alternative” financing options.
1) Private Money Lenders
Also known as “hard” money lenders, this loan source allows a borrower to finance a home via a private, third-party lender. Instead of repaying the bank, a borrower repays the lender directly.
2) Seller Financing
Just like it sounds, seller financing relies on the home seller to finance the purchase. Instead of owing a bank, a borrower would owe the seller directly. Attractive because it can act as a viable option when you can’t meet the rigid standards of a conventional or non-conventional mortgage.
Be Prepared
A home mortgage will likely be the biggest purchase of your life, so be prepared, and don’t go it alone. From the different loan types to ways to save through an all-in-one mortgage or mortgage points, it’s important to have all the information.
Contact us today to schedule a thirty or sixty-minute consultation to walk you through the mortgage process.
