When first-time buyers are shopping for a home, they are likely presented with a dizzying array of potential loan options. From jumbo to FHA mortgages, the lingo can get a bit difficult to follow for those with little experience in real estate. To that end, figuring out what the various mortgage types are and what each entail will help shoppers find the home loan product that works best for them given their unique financial circumstances.
Perhaps the best-known mortgage type is all in the name: Conventional home loans are those that don't need to be backed or insured by the federal government through the Federal Housing Administration, U.S. Department of Agriculture's Rural Housing Service or the U.S. Department of Veterans Affairs, according to NerdWallet.
Instead, conventional loans will often be backed by the government-sponsored entities Fannie Mae or Freddie Mac. They come with a greater risk for lenders than those backed by the federal government specifically, which will often change how lenders view applicants.
One thing to keep in mind about conventional mortgage is that they simply won't be available for all homes, the report said. Specifically, the Federal Housing Finance Agency sets a maximum price level for homes conventional mortgages can be used to be; in 2018, that number is $453,100 – well above the national median.
However, there are exceptions in areas where homes are particularly expensive, so it's best for first-time buyers to check in with a lender to see what the limit is in the areas they're shopping in. Moreover, people looking to buy more expensive homes than conventional mortgages will allow may still have some options with jumbo mortgages.
Because of the higher risk involved with these mortgages, shoppers will need to keep in mind that they will face potentially higher rates and tougher qualification standards, according to Investopedia. Lenders may also allow borrowers to apply "points" on the mortgage, so that they can artificially lower their interest rates by paying a certain amount above and beyond the purchase price.
Further, that level of risk will typically require borrowers to provide a lot of documentation related to their income, assets, employment and identity, the report said.
What else to keep in mind
When consumers are thinking about going with a conventional mortgage, rather than some of the more forgiving federal loans (such as FHA or VA), borrowers will typically have to have credit scores of at least 680, according to Bankrate. However, lenders will probably want to see ratings that are even higher than that, in excess of 700. They will likely also have to carry relatively low debt-to-income ratios. The good news is that these loan types may be ideal for some shoppers because they carry shorter turnaround times for approvals.
As with anything else in the homebuying process, would-be borrowers should always work in careful conjunction with their real estate agents and the professionals at their lenders to make sure they're finding the loan options that work best for them and what they will need to do every step of the way.
For more information about this article, call 866-614-5959.