Managing Your Mortgage

Conforming loans meet the basic qualifications for purchase by Fannie Mae or Freddie Mac. Let’s take a closer look at what exactly that means for you as a borrower.

Your lender has two options when you sign off on a mortgage loan. Your lender can either hang onto your loan and collect payments and interest or it can sell your loan to Fannie or Freddie. Fannie and Freddie are real estate investment companies that buy mortgages after closing. Most lenders sell your loan within a few months after closing to ensure they have a steady cash flow to offer more loans with.

The Federal Housing Finance Agency (FHFA) sets the rules for the loans Fannie and Freddie can buy. There are a couple of basic criteria that your loan must meet so it conforms to purchase standards. First, your loan must be below the maximum dollar limit for your area. In most parts of the contiguous United States, the maximum loan amount for a conforming loan in 2021 is $548,250. In Alaska, Hawaii and certain high-cost counties, the limit is $822,375. Higher limits also apply if you buy a multi-unit home. Your lender can’t sell your loan to Fannie or Freddie and you can’t get a conforming mortgage if your loan is more than the maximum amount. You’ll need to take a jumbo loan to fund your home’s purchase if it’s above these limitations.

Second, the loan cannot already have backing from a federal government body. Some government bodies (including the United States Department of Agriculture and the Federal Housing Administration) offer insurance on home loans. If you have a government-backed loan, Fannie and Freddie may not buy your mortgage. When you hear a lender talk about a “conforming loan,” they’re referring to a conventional mortgage only.

You’ll also need to meet your lender’s specific criteria to qualify for a conforming mortgage. For example, you must have a credit score of at least 620 to qualify for a conforming loan. You may also need to take property guidelines and income restrictions into account when you apply for a conforming loan. A Home Loan Expert can help determine if you qualify based on your unique financial situation.

Conforming loans have well-defined guidelines and there’s less variation in who qualifies for a loan. Because the lender has the option to sell the loan to Fannie or Freddie, conforming loans are also less risky than jumbo loans. This means that you may be able to get a lower interest rate when you choose a conforming loan.

Conventional Mortgages

A conventional loan is a conforming loan funded by private financial lenders. Conventional mortgages are the most common type of mortgage. This is because they don’t have strict regulations on income, home type and home location qualifications like some other types of loans. That said, conventional loans do have stricter regulations on your credit score and your debt-to-income (DTI) ratio.

You can buy a home with as little as 3% down on a conventional mortgage. You’ll also need a minimum credit score of at least 620 to qualify for a conventional loan. You can skip buying private mortgage insurance (PMI) if you have a down payment of at least 20%. However, a down payment of less than 20% means you’ll need to pay for PMI. Mortgage insurance rates are usually lower for conventional loans than other types of loans (like FHA loans).

Conventional loans are a good choice for most consumers who don’t qualify for a government-backed loan or want to take advantage of lower interest rates with a larger down payment. If you can’t provide at least 3% down and you’re eligible, you could consider a USDA loan or a VA loan.

Fixed-Rate Mortgages

A fixed-rate mortgage has the exact same interest rate throughout the duration of the loan. The amount you pay per month may fluctuate due to changes in local tax and insurance rates, but for the most part, fixed-rate mortgages offer you a very predictable monthly payment.

A fixed-rate mortgage might be a better choice for you if you’re currently living in your “forever home.” A fixed interest rate gives you a better idea of how much you’ll pay each month for your mortgage payment, which can help you budget and plan for the long term.

You may want to avoid fixed-rate mortgages if interest rates in your area are high. Once you lock in, you’re stuck with your interest rate for the duration of your mortgage unless you refinance. If rates are high and you lock in, you could overpay thousands of dollars in interest. Speak to a local real estate agent or Home Loan Expert to learn more about how market interest rates trend in your area.

Adjustable Rate Mortgages

The opposite of a fixed-rate mortgage is an adjustable rate mortgage (ARM). ARMs are 30-year loans with interest rates that change depending on how market rates move.

You first agree to an introductory period of fixed interest when you sign onto an ARM. Your introductory period may last between 5 to 10 years. During this introductory period you pay a fixed interest rate that’s usually lower than market rates. After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to determine how rates are changing. Your rate will go up if the index's market rates go up. If they go down, your rate goes down.

ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For example, interest rates might keep rising year after year, but when your loan hits its rate cap your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.

ARMs can be a good choice if you plan to buy a starter home before you move into your forever home. ARMs give you access to below-market rates for an initial introductory period. You can easily take advantage and save money if you don't plan to live in your home throughout the loan’s full term.

These can also be especially beneficial if you plan on paying extra toward your loan early on. ARMs start with lower interest rates compared to fixed-rate loans, which can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.

You have a non-conforming loan if your loan doesn’t meet conforming standards. Non-conforming loans have less strict guidelines than conforming loans. These loans can allow you to borrow with a lower credit score, take out a larger loan or get a loan with no money down. You may even be able to get a non-conforming loan if you have a negative item on your credit report, like a bankruptcy.

There are two major types of non-conforming loans: government-backed loans and jumbo loans.

Government-Backed Loans

Government-backed loans are insured by government bodies. When lenders talk about government-backed loans, they’re referring to three types of loans: FHA, VA and USDA loans. These loans are less risky for lenders because the insuring body foots the bill if you default. You may have more success getting a government-backed loan if you can’t get a conventional loan.

Each one of these loans has specific criteria you need to meet in order to qualify along with unique benefits. Let’s take a look at each of the three types of government-backed loans: 

• FHA loans: FHA loans are insured by the Federal Housing Administration. An FHA loan can allow you to buy a home with a credit score as low as 580 and a down payment of 3.5%. With an FHA loan you may be able to buy a home with a credit score as low as 500 if you have at least 10% down.
• USDA loans: USDA loans are insured by the United States Department of Agriculture. USDA loans have lower mortgage insurance requirements than FHA loans and can allow you to buy a home with no money down. You must meet income requirements and buy a home in a suburban or rural area in order to qualify for a USDA loan.
• VA loans: VA loans are insured by the Department of Veterans Affairs. A VA loan can allow you to buy a home with $0 down and lower interest rates than most other types of loans. You must meet service requirements in the Armed Forces or National Guard to qualify for a VA loan.

You may be able to save on interest or down payment requirements if you qualify for a government-backed loan. Make sure you meet loan requirements before you apply.

Jumbo Loans

A jumbo loan, like the Jumbo Smart Loan from Rocket Mortgage®, is a loan that’s worth more than conforming loan standards in your area. You usually need a jumbo loan if you want to buy a high-value property. For example, you can get up to $2.5 million in a jumbo loan if you choose Quicken Loans®. The conforming loan limit in most parts of the country is $548,250. 

The good news is that jumbo loan interest rates are usually similar to conforming interest rates. The bad news is that it’s more difficult to qualify for a jumbo loan than other types of loans. You’ll need to have a higher credit score and a lower DTI to qualify for a jumbo loan.

So, what’s the best type of loan for a first-time home buyer? The answer depends on your individual preferences and situation. Your credit score, income, debt and property location all influence the type of loan you can get. Rocket Mortgage® and our team of Home Loan Experts can assist with a personalized solution.

First-time home buyers have access to a large number of different loan types. The most common type of mortgage is a conforming conventional loan. A conforming loan means that it meets the basic qualifications for purchase by mortgage investors Fannie Mae and Freddie Mac. Conforming loans have standardized criteria and lower interest rates than some other loan types. You may choose either a fixed-rate mortgage with an interest rate that stays the same or an adjustable rate mortgage. Adjustable rate mortgages’ interest rates change as market rates change.

Non-conforming loans include government-backed and jumbo loans. Government-backed loans have stricter qualification criteria but also looser credit score and down payment requirements. Jumbo loans are high-value loans that go above the loan limits set by Fannie or Freddie.  our Home Loan Experts can help you compare mortgage solutions and determine the best fit for you.