When shopping for home loans, you may be overwhelmed at the prospect of finding the right fit for you. There are a number of different types of loans, with different limits, terms, rates and lending guidelines. Here we look at two of the most popular loan types, the conforming loan, and the jumbo loan, and assess the differences between them.
Conforming Loan
A conforming loan is a loan that conforms to the Federal Housing Finance Agency (FHFA) guidelines. These loans are provided by Fannie Mae and Freddie Mac. The most well-known guideline is the loan limit, which is $424,100 for a single-family home in 2017. Conforming loans also have other guidelines which determine who can access them.
Loan Size
The conforming loan size for 2017 has been set at $424,100, which is based on the median home price in a year from October to October.
Loan Rates
Conforming loan rates are more competitive than jumbo loan rates, and loans are offered as both adjustable rate mortgages (ARMs) and fixed-rate mortgages.
Credit Score Requirements
This differs from lender to lender, but the average credit score required is 620.
Assets and Income
All income types can be used when applying for a conforming loan. Your lender may also need you to show evidence of assets such as two to three months savings, where one month is equivalent to one full month’s mortgage payment including principal, interest, taxes, and insurance.
Debt
You can be approved above the debt-to-income ratio for a conforming loan as they are more flexible. However, it is important to ensure you feel comfortable with the monthly payment.
Jumbo Loans
A jumbo loan is a loan that exceeds the size limits for a conforming loan. Just like conforming home loans, the limits and guidelines are set by Fannie Mae and Freddie Mac. But because jumbo loans lend a larger amount, the guidelines are more stringent.
Loan Size
A jumbo loan is any loan amount that is above the limit set for conforming loans. So in 2017, a jumbo loan would be for amounts above $424,100.
Loan Rates
The interest rates for jumbo loans are not as attractive as they are for conforming loans. Adjustable rate mortgages are more popular when it comes to jumbo loans. Fixed rate mortgages are also available for jumbo home loans, but the interest rates are much less attractive than for conforming loans.
Credit Score Requirements
As the guidelines for jumbo loans are more stringent, the minimum credit score requirement is around 700.
Assets and Income
As with conforming home loans, any income can be used to apply for jumbo loans. However, in addition to down payment and closing costs, a jumbo lender will want to see a minimum of twelve months savings for mortgage payments.
Debts
Jumbo lenders will generally limit debt to income ratio at 45% or even 40%.
Choosing the right loan for your needs relies on a careful evaluation of your goals and personal situation. Talk to Karen Douglas today for expert mortgage advice and more specific information on the right loan for you.