What type of Loan will I need?

After you sell your home you will also need to get a loan for a new one, unless the proceeds from your current home enable you to purchase your next home with cash!

When the time comes to go shopping, first for lenders and then for a mortgage, you’ll be inundated with terminology that can be confusing and intimidating. Let’s review the key terms you’ll see when viewing options.

Conventional vs. Non-Conventional Loans

Conventional loans are not insured by the federal government. Most first-time home buyers will find usefulness in getting a mortgage that is insured by the federal government, as down payments can be lower than 10 percent with non-conventional mortgages.

A conventional mortgage issued with less than 20 percent paid on a down payment will typically require private mortgage insurance (PMI) be attached to the loan until the purchaser accumulates at least 20 percent equity in the home.

Conforming vs. Nonconforming Loans

A conforming mortgage is a loan that falls below the max allowed by government-backing entities like Freddie Mac and Fannie Mae. Loans that come in above the federal maximum (as maintained by the Federal Housing Authority) are nonconforming loans.

In 2019, the maximum allowed for a conforming loan is $484,350, with special stipulations for certain areas of the country where most home values are 115 percent above this max level. In these areas, the ceiling is raised to 150 percent of the max amount, or $726,525.

And lastly, we have Jumbo Loans, which are conventional loans for amounts above the federal limits for conforming loans. Jumbo loans typically require proof of assets worth at least 10 percent of the home’s purchase price, high income requirements, and strong credit scores.

Government-Backed Loans

While the federal government doesn’t issue mortgages directly, it does insure them, making it less risky for lenders to issue these loans. As a result, the minimum credit scores and down payments needed can be relaxed for government-backed mortgages.

Most first-time buyers find that FHA-backed loans are the most attractive option. With a minimum credit score of 580, a first-time buyer can put just 3.5 percent of the home’s price as a down payment. Loan limits for FHA-backed loans as of 2019 are $314,827 for single-family dwellings in lower-cost areas, and up to $726,525 in higher-cost counties. A full breakdown of U.S. limits by county can be found here.

In addition to the FHA, the Veteran’s Authority (VA) and the U.S. Department of Agriculture (USDA) also back loans to individual buyers. The VA loans are available to military personnel and their families. And VA-backed loans often have no down payment needed, and may even be able to have closing costs paid by the seller, or rolled up into the loan itself.

USDA-backed loans are available in rural areas for low- and middle-income buyers, and may also require no down payment if you meet the income limitations.

Fixed-Rate Loans

This is the most common mortgage structure. Fixed mortgages are just that, fixed in place with an interest rate that doesn’t change over the life of the loan. Most fixed mortgages are 15-year, 20-year, and 30-year payback periods. The main benefit to the borrower here is that you know exactly what your mortgage payment will be each month.

If you plan on living in your first home for seven to 10-plus years, fixed rate is probably the best route to go. You’ll build equity a bit slower than with variable-rate loans, and you’ll pay slightly higher interest costs over the long run, but the predictability of mortgage payments and the sense of security from locking in a set interest rate are immensely attractive.

Variable-Rate Loans

These have an initial period with a fixed interest rate (which is generally lower than the rate you’d get on a fixed-rate loan), but then after a few years switches to a variable rate, based on market conditions.

If you’re a first-time buyer who thinks they may only live in their first home a few years before moving, maybe a variable-rate mortgage is a good bet. Your goal here would be to sell or refinance before, or soon after, the variable phase of the interest rate sets it. This way you avoid any adverse situation where market interest rates fluctuate wildly and your interest payments potentially spike higher.

Government-backed loans are offered on both fixed and variable-rate terms.

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