Thinking about buying a home? Do you know what kind of mortgage you want? Do you know what kind you can get? Who is Fannie Mae and why does she want to give you money?
There are so many terms out there that it can make a buyer’s head spin. Here’s a quick reference guide of terms you will run into when looking into getting a loan for a new home.
Fannie Mae/Freddie Mac
The Federal National Mortgage Association (FNMA) aka Fannie Mae and The Federal Home Loan Mortgage Corporation (FHLMC) aka Freddie Mac, are two Government Sponsored Enterprises (GSE) that are privately owned, but publicly chartered, and exist to offer credit for home financing. Both are stockholder owned corporations authorized to make loans and loan guarantees.
Conforming vs. Non-conforming
If a loan meets all of the underwriting requirements under Fannie Mae and Freddie Mac, it is considered conforming. If it doesn’t, it is non-conforming. For example, if the loan limit is $417,000 and it exceeds that amount, it will be non-conforming and can in turn carry a higher mortgage rate. If it is higher than the limit that is set, it is called a jumbo loan.
A conventional loan refers to any loan that is not insured or guaranteed by the government. They can be conforming or be jumbo. They tend to be riskier as the bank is taking a bigger chance on the buyer paying the loan off rather than having the protection of the government as in government loans.
These loans are backed or insured by the government. There is less of a risk to the lender but there are more limitations on the buyer. That said you also have the ability to get a loan when you have a lower credit score so more people are able to get them.
This is a government loan that is insured by the Federal Housing Administration. The lenders are protected against default due to the government backing, so the buyer can benefit from better mortgage rates. They readily accept applicants with lower credit scores and includes more paper work and details but it could be worth it if you are trying to recover from a financial downfall. Whether or not the seller will accept this type of loan varies and it might affect your search for the perfect home.
A.R.M. (Adustable-Rate Mortgage)
These types of loans aren’t perfect for everyone, but it depends on your situation. You start with a lower mortgage rate from one year to five or more, then the rate is adjustable based on the index and margin. The margin doesn’t change but the index can change regularly leaving you with a fluctuating mortgage payment and the chance that you could be paying a lot more some years if the index is high.
If you don’t plan on keeping a home for more than five years, this could be a good option for you as you can sell or refinance before the change in your rate comes. Depending on the loan you get, the rate can change at different times -- as often as every six months. Although these loans will have caps (can’t go higher than a set rate) and sometimes floors (can’t drop below starting rate), some people just feel safer with a fixed-rate.
A fixed-rate mortgage is the most commonly used these days. The rate never changes over the duration of the loan, which, typically, would be 30 years. One negative could be that the rate that you secure is higher than anything you could have gotten with an ARM. That said you are trading the percentage point for structure and reliability. These days, fixed-rates are actually lower than ARMs but as the market fluctuates regularly, this can change anytime.
Bridge loans can be beneficial to some homebuyers but they are a risky choice. They are temporary loans that bridge the gap between the sales price of a new home and a home buyer's new mortgage, in the event the buyer's home has not yet sold. The bridge loan is secured to the buyer's existing home. The funds from the bridge loan are then used as a down payment on the next home. There are generally no payments for the first four months of the bridge loan, which hopefully leaves ample time to sell the first home but it still gains interest that is expected to be paid upon sale of the first home. It would be ideal to sell your first home before trying to get into a new one so you can avoid the guaranteed extra costs of a bridge loan but for some people, it’s the right step. Be sure to do your research and calculations before agreeing to this type of loan.