Finding the property of your dreams is only half the battle, the other half (and frankly the more important half) includes figuring out how to fund your purchase.
Unless you have a lot of liquid cash, you will most likely need to take out a mortgage. Since this financial decision will have long-term implications on your financial future, you must take it very carefully and choose a mortgage that meets your budget and needs.
Here’s a rundown of the four types of mortgage loans:
A mortgage that isn’t backed by the federal government constitutes a conventional loan. In this case, a borrower with good credit, a stable job, and a good income can make a 3% down payment and secure a conventional loan backed by either Fannie Mae or Freddie Mac, two government-approved enterprises that handle the majority of conventional mortgages in the United States.
An easy way to avoid getting private mortgage insurance (PMI), is by making a 20% down payment instead of 3%.
Conforming Mortgage Loans
Conforming loans come with a set loan limit that gets decided by the federal government. These limits are based on geographical boundaries. The baseline Conforming Loan Limit (CLL) set for 2021 by the Federal Housing Finance Agency is $548,250 for one-unit properties.
Areas where property costs are higher (like NYC), tend to have a baseline loan limit that is usually 115% higher.
Nonconforming Mortgage Loans
Nonconforming loans are popularly known as jumbo loans because their loan amount usually exceeds the set conforming loan limit. The loan underwriting guidelines forbid Fannie Mae and Freddie Mac to sell or buy these types of mortgages. Since these loans tend to be on the riskier side, the borrower is required to show large cash reserves, have strong credit, and make down payments of 10% or more.
Government-Insured Federal Housing Administration (FHA) Loans
First-time home buyers with a low-to-moderate-income usually turn to Federal Housing Administration (FHA) loans if they don’t qualify for conventional loans. In these loans, the borrower is required to put down as little as 3.5% of the loan value.
Compared to conventional loans, FHA loans are more relaxed when it comes to credit-score requirements. In fact, borrowers with a FICO score of 500 qualify for a 10% down payment, and 580 qualify for a 3.5% payment.