Here are some common mortgage types:

Conventional Conforming Loans

A conventional loan is a loan that’s not insured by the federal government. Most conventional loans are conforming loans. “Conventional” means a lender is issuing a loan without a government agency’s security. “Conforming” means the mortgage meets the requirements set by Fannie Mae and Freddie Mac– two government-sponsored enterprises that buy loans to keep mortgage lenders liquid so they have enough capital to continue lending to borrowers.

Conventional loans are a popular choice among buyers. Depending on your finances, homeownership history, and credit score, you may be able to get a conventional loan with a 3% down payment, which can get you into a home sooner. But you should also factor in the monthly cost of private mortgage insurance because you put less than 20% down.

Non-Conforming Loans: Government-Insured Mortgages

Many lenders also offer government backed mortgages Government-backed home loans are especially attractive to first-time and low- to moderate-income borrowers and borrowers with smaller savings and credit issues.

FHA Loan

FHA are backed by the Federal Housing Administration. They’re popular because they have lower down payments and credit score requirements. You can get an FHA loan with a 3.5% down payment and a 580 credit score.

The FHA promises to reimburse lenders when a borrower defaults on their loan, sharing the risk lenders assume when issuing a loan. The guarantee encourages lenders to make these loans available to borrowers with lower credit scores and smaller down payments.

VA Loans

VA are loans backed by the Department of Veterans Affairs. It’s a home buying benefit for qualified active-duty military members, reservists, National Guard members, veterans and their surviving spouses.

VA loans are a great option because, if you qualify, you can buy a home for 0% down, and you won’t pay mortgage insurance.

USDA Loans

is a government-backed mortgage designed to help low- and moderate-income homebuyers in rural and suburban areas purchase homes with favorable terms. These loans are administered by the U.S. Department of Agriculture (USDA)through its Rural Development (RD) program. The loan only applies to homes in USDA-approved rural and suburban areas. To qualify for a loan, a borrower’s household income can’t exceed 115% of an area’s median income.

You can buy a home for 0% down, and for some borrowers, the USDA’s required guarantee fee will cost less than the FHA mortgage insurance premium.

Conventional Non-Conforming Loans: Jumbo Mortgages

Conforming mortgages are subject to lending limits In 2024, the conforming loan limit in most of the U.S. is $766,550. In high-cost housing areas, the limit is as high as $1,149,825. If you want to buy a house that costs more than that and need financing, you’ll apply for a jumbo loans.

Because jumbo mortgages exceed conforming loan limits and aren’t backed by government agencies, they’re considered conventional non-conforming loans. A jumbo loan typically requires at least a 20% down payment and tons of paperwork for approval.

How Are Interest Rates Set By Lenders?

Various factors determine your mortgage rate – and some are beyond a lender or borrower’s control.

Two primary factors determine mortgage interest rates: current market rates and the level of risk a lender assumes with the loan. While you can’t control market rates, you can have some measure of control over how a lender views your application. The higher your credit score, the more assured a lender will feel that you can repay the loan with on-time payments.

Like your credit score, you likely have some level of control over your debt-to-income-ratio. The lower your DTI ratio, the more money you’ll have available to make your mortgage payment.

If your financial indicators, like debt-to-income (DTI) ratio and credit score, demonstrate overall financial health, you’ll likely qualify for a lower interest rate.

Economic Conditions

While the Federal Reserve doesn’t set mortgage rates, market interest rates respond to changes in the federal funds rate.

Your Credit Score, Income And Assets

You can’t control current market rates, but you can have some control over your finances. Pay attention to your DTI ratio and your credit score. The fewer red flags lenders find on your credit report, the more likely it is that you’ll qualify for the lowest possible rates.

To quality for a mortgage, you must meet certain eligibility requirements. While loan and lender criteria will vary, a borrower typically needs a steady income source, a debt-to-income ratio lower than 50% and a decent credit score (generally at least 580 for FHA or VA loans and 620 for conventional loans).

Fixed-Rate Vs. Adjustable-Rate Mortgages

Most mortgages are either fixed-rates or adjustable mortgages (ARMs)

Fixed-Rate Mortgage

Fixed interest rates stay the same for the entire mortgage term. If you have a 30-year-fixed rates-loan with a 6% interest rate, you’ll pay 6% interest until you pay off or refinance your loan. Fixed-rate loans offer predictable payments, which can make budgeting easier.

Adjustable-Rate Mortgage (ARM)

Adjustable mortgage rates adjust based on changes in the market. Most adjustable-rate mortgages have 30-year terms and offer an initial fixed-rate period that usually lasts 5, 7 or 10 years.

After the initial fixed-rate period ends, your interest rate will adjust up or down every 6 months to a year. Your monthly mortgage payment will adjust as the interest rate fluctuates, making the payment more or less expensive.

If you plan to move or refinance before the end of the fixed-rate period or have an expensive mortgage, an adjustable-rate mortgage initially offers lower interest rates than fixed-rate loans.

Note: You may encounter some unfamiliar industry lingo as you shop for a home. Use our glossary to get comfortable with some common mortgage terms.

Amortization

A portion of each monthly mortgage payment goes toward paying interest and paying down a loan’s principal balance. Amortization is how those payments get divided over the life of the loan.

When you begin repaying your loan, a higher portion of your mortgage payment will go toward interest. Over time, more of your payment will go toward paying down your principal balance.

Down Payment

A down payment is the money you pay upfront to purchase a home. In most cases, you’ll put money down to get a mortgage.

The down payment amount you’ll need will vary based on the type of loan you’re getting. Generally, a larger down payment means better loan terms and a smaller monthly mortgage payment. If you put 20% down on a conventional loan, you’ll likely get a favorable interest rate and avoid paying PMI. If you make a 3% down payment – the minimum down payment for conventional loans – you’ll likely pay PMI, increasing your monthly mortgage payment.

Use a mortgage calculator to see how your down payment amount will affect your monthly payments.

Escrow

Part of owning a home is paying for property taxes and homeowners insurance, which lenders manage on a borrower’s behalf through an escrow account. The escrow account operates like a noninterest-bearing checking account and collects the money your lender uses to pay your taxes and insurance. The escrow payments are added to your monthly mortgage payment and then deposited into the escrow account by your lender.

Not all mortgages have an escrow account. If your loan doesn’t have one, you must pay your property taxes and homeowners insurance bills yourself. An escrow account is typically required if your down payment is less than 20%.

How much you have in your escrow account will depend on the annual cost of your insurance and property taxes. Because these expenses may change from year to year, your escrow payment can change, causing your monthly mortgage payment to increase or decrease.

Interest Rate

An interest rate is a percentage charged by a lender each month as a fee for borrowing money. Interest is based on macroeconomic factors, like the federal funds rate, and a borrower’s credit history and financial fitness, like their credit score, income and assets.

Mortgage Note

A mortgage notes is a promissory note that details the repayment terms of a loan used to purchase a property. It’s like an IOU, and it details the repayment guidelines, including:

• Interest rate

• Interest rate type (adjustable or fixed)

• Total loan amount

• Loan term (length of time to pay back the loan)

Once the loan is repaid, the homeowner receives the promissory notes.

Loan Servicer

A loan services sends monthly mortgage statements, processes payments, manages escrow accounts and responds to borrower inquiries.

Sometimes, the servicer is the same company that approved a borrower’s mortgage loan – but not always. Lenders may sell the servicing rights of your loan, and you may not get to choose your new servicer.

The Bottom Line: Mortgages Make Homeownership Possible

Becoming a homeowner requires money, time and effort – and for motivated home buyers, it’s worth the effort. Take the time to familiarize yourself with every aspect of a mortgage before deciding on one of the biggest financial investments you may ever make. Ready to take the first step in your home buying journey? Contact me below!