There are 3 chief types of mortgage loans that people tap to finance their homes: loans insured by the Federal Housing Administration, the ones that are insured from the U.S. Department of Veterans Affairs and traditional loans. The majority of mortgage loans have the traditional type. It’s essential, then, for homeowners to know precisely what these loans are.
Conventional mortgage loans are simply loans made by private entities such as banks, credit unions, private lenders or thrifts. Loans made by the federally regulated home lenders Fannie Mae and Freddie Mac are also regarded as conventional. Loans insured by the Federal Housing Administration or the U.S. Department of Veterans Affairs are the two most common non-conventional mortgage loans.
Conventional mortgage loans come in two basic forms, conforming and non-conforming. Lenders consider traditional loans conforming when they’re made out for approximately $417,000 or less for single-family homes. This figure is known as the loan limit. It’s important to note, however, that in most high-cost areas of the country, the conforming loan limit stands at $729,750. Including the San Francisco Region.
Loans that exceed the conforming loan limit are known as non-conforming loans. Lenders nevertheless consider these to be traditional loans, however. Lenders also refer to these non-conforming traditional loans as unsecured loans. They generally come with higher interest rates than do conforming mortgage loans.
Rates of interest, Terms
Conventional loans come in a variety of forms, including fixed-rate and adjustable-rate. In addition they have varying terms, with the most common traditional loans having a lifespan of 30 years or 15 years. Fixed-rate conventional loans maintain the same interest rate during their lifespan. As their name implies, adjustable-rate mortgages don’t. In these type of loans, the rate of interest fluctuates according to some standard financial index. This means that customers’ mortgage payments can change by the month. Conventional loans with shorter terms usually come with lower interest rates. A 15-year fixed-rate loan, for instance, will have lower interest rates than will a 30-year fixed-rate loan.
When deciding to whom to give mortgage money and in what interest rates, traditional mortgage lenders rely heavily on customers’ three-digit credit ratings. These numbers, that encapsulate a consumer’s financial history, notify lenders that customers are more likely to default on their mortgage loans. Borrowers that have several missed or late payments on their credit reports are going to have lower credit scores than will customers who pay all their bills on time. In general, customers with credit scores of 750 or higher will qualify for the lowest interest rates on traditional mortgage loans.