Types of mortgages for first-time home buyers


* As of April 20, 2020, Quicken Loans® does not offer conventional adjustable rate mortgages (ARMs).

First-time home buyers can choose from different types of loans, and some are especially helpful for these types of home 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 home buyer.


Type 1 loan: conforming loans


Conforming loans meet the basic Fannie Mae or Freddie Mac qualifications for a purchase. Let’s take a better look at what exactly it means to you as a borrower.

Your lender has two options when you sign a home loan. Your lender can keep your loan and collect 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 the loans a few months after closing to ensure they have a steady cash flow to offer more loans.

The Federal Housing Finance Agency (FHFA) sets the rules for the loans that Fannie and Freddie can buy. There are some basic criteria that your loan must meet in order to meet the purchasing standards. First, your loan must be below the maximum dollar limit for your area. In most of the contiguous United States, the maximum amount for a conforming loan is $ 510,400. In Alaska, Hawaii, and some expensive counties, the limit is $ 765,600. In 2021, the limit for a conforming loan will increase to $ 548,250. In Alaska, Hawaii, and some expensive counties, it will rise to $ 822,375. Higher limits also apply if you buy a multi-family home. Your lender cannot sell your loan to Fannie or Freddie, and you cannot obtain a compliant mortgage if your loan exceeds the maximum amount. You will need to take out a jumbo loan to finance the purchase of your home if it exceeds these limitations.

The loan cannot be endorsed by an agency of the federal government. Some government agencies (including the United States Department of Agriculture and the Federal Housing Administration) offer home loan insurance. If you have a government-backed loan, Fannie and Freddie cannot buy your mortgage. When you hear a lender talk about a “conforming loan,” they are referring only to a conventional mortgage.

You will also need to meet your lender’s specific criteria to qualify for a compliant mortgage. For example, you must have a credit score of at least 620 to qualify. You may also need to consider property guidelines and income restrictions when applying for a qualifying loan. A home loan expert can help you determine if you qualify based on your particular financial situation.

Conforming loans have well-defined guidelines and there is less variation in who qualifies for a loan. Since the lender has the option to sell the loan to Fannie or Freddie, conforming loans also have less risk than jumbo loans. This means that you can get a lower interest rate when you choose a qualifying loan.

Conventional mortgages

A conventional loan is a compliant loan financed by private financial lenders. Conventional mortgages are the most common type of mortgage. This is because they do not have strict regulations on income requirements and the type and location of the home, like other types of loans. That said, conventional loans have stricter rules on your credit score and debt-to-income ratio (DTI).

With a conventional mortgage, you can buy a house with a down payment of only 3%. You will also need a minimum credit score of at least 620 to qualify for a conventional loan. You can choose not to purchase private mortgage insurance (PMI) by making a down payment 20% minimum. However, if the down payment is less than 20%, you will have to pay the PMI. Mortgage insurance rates are generally lower for conventional loans than for other types of loans (such as FHA loans).

Conventional loans are a good option for most consumers who do not qualify for a government-backed loan or who want to take advantage of lower interest rates with a down payment higher. If you can’t make a down payment 3% minimum and you are eligible, you might consider a USDA or VA loan.

Fixed rate mortgages

A fixed rate mortgage carries the same interest rate throughout the loan. The amount you pay per month can vary due to changes in local insurance and tax rates, but fixed-rate mortgages often offer a very predictable monthly payment.

It may be a better option for you, if you are living in your “definitive home.” A fixed interest rate gives you a better idea of ​​how much you will pay each month for your mortgage, which can help you budget and plan for the long term.

You may be better off avoiding fixed rate mortgages if rates in your area are high. Once it’s set, your interest rate won’t change for the entire mortgage unless you refinance. If rates are high and you freeze a rate, you could overpay thousands of dollars in interest. Talk to a local real estate agent or home loan expert to learn more about market interest rate trends in your area.

Adjustable interest rate mortgages

The opposite of a fixed rate mortgage is an adjustable rate mortgage (ARM). 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 the index market rates go up. If they go down, your rate will go down.

ARMs include maximum rates that establish how much your interest rate can change in a given period and during the life of your loan. The maximum rates protect you from the accelerated increase in interest rates. For example, interest rates could continue to increase each year, but when your loan reaches its maximum rate, it will not increase any further. On the other hand, maximum rates also limit the amount that can lower your interest rate.

ARMs can be a good option if you plan to buy your first home before moving into your permanent home. They give you access to lower-than-market rates for an initial period. You can take advantage of saving money easily if you do not plan to live in your house for the entire term of the loan.

They can also be very useful if you plan to pay more for your loan up front. ARMs start with lower interest rates than fixed-rate loans, which can give you a little more money to pay off principal. Paying more for your loan up front can save you thousands of dollars later.


Type 2 loan: non-conforming loans


Your loan is a non-compliant loan if it doesn’t meet the compliance standards. Non-conforming loans have less strict guidelines than conforming loans. With these, you can borrow money with a lower credit score, or obtain a higher or no loan. down payment. You can even get a non-conforming loan if you have a negative point on your credit report, such as bankruptcy.

There are two main types of non-conforming loans: government-backed loans and jumbo loans.

Government-backed loans

Loans government-backed are insured by government agencies. When lenders talk about government-backed loans, they mean three types of loans: FHA loans, VA loans, and USDA loans. These loans are less risky for lenders because the insurance agency takes over the payment in the event of default. You may have a better chance of obtaining a government-backed loan if a conventional loan is not available to you.

Each of these loans has specific criteria that you must meet to qualify, and they also have unique benefits. Let’s look at each of the three types of government-backed loans:

  • FHA loans: 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 down payment 3.5%. Instead, with a down payment 10%, you can buy a home with a credit score as low as 500 with an FHA loan.
  • USDA Loans: USDA loans are insured by the United States Department of Agriculture. They have fewer mortgage insurance requirements than FHA loans and can allow you to buy 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 without down payment and with lower interest rates than most other types of loans. You must meet the requirements for service in the military or the National Guard to qualify for a VA loan.

You may be able to save on interest or loan requirements down payment if you qualify for a government-backed loan. Make sure you meet the loan requirements before submitting your application.

Jumbo loans

A jumbo loan is a higher value loan than the 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 Quicken Loans®. In most 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 the interest rates on jumbo loans are often similar to the interest rates on conforming loans. The bad news is that it is more difficult to qualify for a jumbo loan compared to other types of loans. You will need to have a higher credit score and a lower DTI to qualify for a jumbo loan.


The best type of loan for first-time home buyers


So what is the best type of loan for first-time home buyers? The answer depends on your preferences and your particular situation. Your credit score, your income, your debt, and the location of the property all influence the type of loan you can get. Rocket Mortgage® and our team of home loan experts can help you with a customized solution.


Summary


First-time home buyers have access to a wide variety of loan types. The most common type of mortgage is a conventional conforming loan. A conforming loan means that you meet the basic purchase qualifications of mortgage investors Fannie Mae and Freddie Mac. Conforming loans have standardized criteria and lower interest rates than some other types of loans. You can choose a fixed rate mortgage to keep the rate the same or an adjustable rate mortgage. The interest rates of the latter change according to the variation of market rates.

Non-conforming loans include government-backed loans and jumbo loans. Government-backed loans have stricter qualification criteria, but also credit score and credit score requirements. down payment more flexible. Jumbo loans are high-value loans that exceed the loan limits set by Fannie or Freddie. Rocket Mortgage® and our home loan experts can help you compare mortgage solutions and determine the best option for you.


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