With so many alternatives on the market, choosing the best mortgage loan can be stressful. Before selecting a mortgage loan or lender, find out about the different mortgage types, terms, and types of interest rates.
Below, we’ll guide you through the process of selecting a mortgage to purchase, build, or renovate your home.
Types of Mortgage Loans
A mortgage is a type of loan used to purchase, refinance, or remodel a home. Banks, credit unions, and other financial institutions offer conventional, nonconforming, and government-backed mortgage loans.
A good way to compare between different home loans is with our home affordability calculator, where you can input different loan types and terms to see a ballpark payment.
Conventional Mortgage Loans
There are different types of conventional loans, and application requirements for each depend on the loan and lender type.
Originated and serviced by several different types of financial institutions, including banks and credit unions, conventional loans tend to have stricter eligibility requirements than government-backed loans and usually require the borrower to have both a higher credit score and a debt-to-income ratio of 36%, although some lenders will accept DTI’s as high as 50%. They commonly have 15-, 20- or 30-year terms.
Conventional loans are available for purchase, renovations, or home refinance. If you’re still deciding on a type of mortgage loan or lender, check our selection for the best mortgage lenders.
Conventional mortgages aren’t insured by the federal government, and are classified as conforming or nonconforming.
- Conforming loans follow funding requirements established by Freddie Mac and Fannie Mae (two federally backed home mortgage companies created by the U.S. Congress) or exceed the loan limits set by the Federal Housing Finance Agency (FHFA).
- Nonconforming loans don’t follow those underwriting guidelines and/or exceed the FHFA loan limits.
Conforming Mortgage Loans
As we mentioned above, a conforming mortgage is a conventional loan that meets the funding criteria set by Fannie Mae and Freddie Mac, and the FHFA loan limits. The latter means that the loans cannot go over a certain amount, which for single-family homes in 2022 is a base of $647,200 (and $970,800 in high-cost areas, as well as Alaska, Hawaii, Guam, and the U.S. Virgin Islands). Conforming loan terms generally range between 10 and 30 years.
A conforming mortgage is suitable for those who:
- Want to avoid high-interest payments
- Can make larger down payments
- Are purchasing a home not exceeding the limits established by Fannie Mae and Freddie Mac
Nonconforming Mortgage Loans
Nonconforming mortgages are loans that don’t meet Fannie Mae …….