Fixed versus Adjustable Rate
A conventional 30 year fixed-rate loan is the most common type of loan issued. The interest rate, and thus the payment, stays constant through the entire loan term. This loan is the most common loan used by buyers. It is ideal for people who are buying a home and are intending to stay in the home for a long period of time and wish to keep the mortgage payment a constant.
By contrast, an adjustable rate mortgage will have the ability to reset according pre-established conditions and intervals written into the mortgage contract. Usually these loans will be fixed at a lower rate for a set interval early in the loan, typically 3 to 10 years, and then change annually thereafter. Typically, there is a cap to the annual change in rate as well as a lifetime cap to the maximum interest rate of the loan so that the borrower knows in advance what their highest payment could be. These loans can be a boon to a buyer who is likely to sell again in a relatively short period of time or if the adjusted rate falls below what the initial purchase rate.
Conforming versus Jumbo Loans
Conforming loans are described as such because they meet the underwriting guidelines of Fannie Mae or Freddie Mac. These two entities are corporations that purchase and sell mortgage backed securities to investors on Wall Street under government established requirements. The loan limit for high balance conforming loans in Ventura County is currently $603,750.
Jumbo loans exceed these requirements and represent a greater risk for investors. The loans are for larger amounts and as such require borrowers to have excellent credit and require larger minimum down payments when compared to conforming loans, ranging from 15% to 20% of purchase cost. These loans typically have higher interest rates as well.
Conventional and Government Backed Financing
Conventional loans are direct transactions between borrower and lender. The lenders have a strict set of credit, income, down payment, and debt to income requirements that a buyer must qualify under. A typical down payment is at least 20%, or as little as 3% if the buyer pays mortgage insurance. Gift Funds from family members are allowed. Freddie Mac also allows family members to be non-occupying borrowers to help qualify for the home.
For buyers who need greater flexibility than is afforded by direct lender transactions, FHA loans are insured by the Federal Housing Administration. This gives the lenders a guarantee that the loan will be satisfied, as well as provides a different and less restrictive set of qualification requirements. The greatest advantage of an FHA loan is the reduced down payment requirement, which can be as low as 3.5%. FHA loans do require mortgage insurance as well. Gift Funds from Family are allowed. FHA also allows family members to be non-occupying borrowers to help qualify for the home.
There is another loan program available to veterans, active duty military, and their surviving spouses. The VA loan is insured by the Federal Government and can be up to 100% of Purchase Price within County Loan Limits. VA limits specific costs associated with obtaining a mortgage for the Veteran. If you are a veteran, a mortgage professional can guide you through the process, beginning with obtaining your certificate of eligibility.
This is but a brief summary of the options that a buyer will find themselves presented with when looking at their mortgage options. For a more detailed explanation, or to help find the right mortgage for you, please contact us through e-mail at firstname.lastname@example.org or directly at 805-328-3799.
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Written by Nelson Buss