Conforming loans. These loans follow certain rules set by the government, as well as by government-sponsored entities Fannie Mae and Freddie Mac, which provide backing for conforming loans.
In 2019, the standard limit for a conforming loan is $484,350 for a single-family home in most markets and up to $726,525 in high-cost areas. Other requirements include:
A credit score of 620 or higher for fixed-rate mortgages, or 640 or higher for adjustable-rate mortgages.
A debt-to-income ratio of 36% or lower, or up to 50% in certain situations.
A down payment of at least 5% with most loans, or 3% in certain situations.
Conforming loans tend to be less risky for lenders, so they may offer better terms than nonconforming loans.
Nonconforming loans. These conventional loans do not follow one or more of the standards created for conforming loans. The most common type of nonconforming loan is a jumbo loan, which exceeds the standard loan limit for conforming loans. Jumbo loans tend to have higher credit score and down payment requirements, as well as lower debt-to-income ratio limits.
Other nonconforming loans may be available if your credit score doesn’t meet the minimum requirements, you’re self-employed or your circumstances are unusual.
Opt for a nonconforming loan if the loan amount or your financial situation doesn’t meet conforming standards set by Fannie Mae and Freddie Mac.
Fixed-rate loans. As the term suggests, these loans have a fixed interest rate. This means your principal and interest payments won’t change for the life of the loan.
The rate on a fixed-rate option usually starts out high compared with adjustable-rate loans, but you’ll have the benefit of knowing what your rate will be until you pay off the loan, sell the house or refinance.
Consider a fixed-rate loan if you’re planning on staying in the home for a while and don’t want to deal with the uncertainty of an adjustable rate that can fluctuate. Terms for fixed-rate loans are generally 15 or 30 years.
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