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Understanding Mortgages

Jumbo vs Conventional loans

Jumbo vs Conventional Loans: Which Should You Choose?

Throughout your homeownership journey, you'll need to make lots of decisions - none bigger than the property you ultimately wind up selecting, of course. But another major choice is the loan you take out.

Much like houses themselves, there are lots of loan products to pick from. Two of the more common options are conventional loans and jumbo loans. While they have a number of similarities, there are even more differences between them. And while you have probably heard of each, you may not know exactly how they work or what they are. And in the debate over jumbo vs conventional loan products, you may also be wondering which one is right for you.

This explainer should help you find the answer:

Should I use a jumbo loan or conventional loan?

Before you can decide which one is the better fit for you, it pays to know what they're all about. For starters, as the name implies, conventional loans are the most popular mortgage product of them all, largely because they offer the greatest variety of options to borrowers. This includes selecting the length of time you choose to pay off the loan - 30 years being the most common - the down payment amount, and the interest type. A fixed-rate loan means the interest rate stays the same for the life of the loan while an adjustable-rate changes over time, influenced by market dynamics and the terms of the mortgage provider. Interest rates on ARMs may be slightly higher or lower than market value, which makes them ideal for those who are comfortable with variability.

Conventional loans are also conforming loans, yet another term you've probably heard mentioned before. It essentially means that they conform to - or abide by - the terms and conditions established by Fannie Mae and Freddie Mac, which are government-sponsored entities that ultimately buy loans, and then package and sell them as mortgage-backed securities to investors.

That's a thumbnail sketch of what conventional loans are, but they have a number of advantages addressed further a bit later. 

As for jumbo loans, as the term "jumbo" suggests, they're for houses that typically sell for significantly more than the national median. Similar to conventional loans, jumbo loans come with options, as borrowers get to decide the term length - usually in five-year increments - and whether they'll pay interest on a fixed- or adjustable-rate basis. However, unlike conventional loans, these are non-conforming, meaning they don't abide by Fannie and Freddie guidelines and therefore are not backed by the GSEs.

One of those guidelines established by GSEs is how much money would-be buyers can borrow to pay for a home purchase, which is also known as the conforming limit. The maximum can vary depending on the state and county you live in, but generally speaking, the maximum is $484,350. In other words, if you're looking to buy a residence, but the selling price is $500,000 or more, a conventional loan wouldn't be your best option.

That's where a jumbo loan may be a better alternative because it allows you to borrow money above the limits established by Fannie and Freddie. Of course, there's a little bit more to it than price point when choosing between jumbo vs conventional loan products, and these aspects can also help you decide which is the better option.

What are the advantages of jumbo vs conventional loan options?

As noted by The Mortgage Reports, perhaps the biggest upside of conventional loans is that they're among the least restrictive in terms of qualification standards. The down payment is a classic example. Many people rightly assume 20% is a common amount put forward as a lump sum down payment. But that can be a difficult ask for first-time buyers who may be just graduating from college or are raising a family. Fortunately, the down payment can be for much less than this, as low as 3% in some cases.

Requirements for credit scores - which help lenders assess your ability to pay off bills - also tend to be looser. The minimum for conventional loans is a FICO® score of around 620, which is below the overall applicant average of roughly 720, according to estimates compiled by The Mortgage Reports.

Jumbo loans also have their highlights. None is more prominent than the high loan amount you may be eligible to borrow, above $1 million depending on your qualifications, which is determined in the application process. However, because these products involve more money - thus more risk for the lender - the approval standards aren't as lenient compared to conventional loans. For example, while jumbo loans allow you to select how much you want to
spend as a down payment, the minimum is usually 20%, which means you may not need to purchase private mortgage insurance as a result. Your FICO® score will also need to be slightly higher than with a conventional loan.

 

The same goes for your debt to income ratio, or DTI. This calculation is something lenders use to determine how much of your earnings go toward regularly occurring expenses, and is calculated by adding up your monthly debt payments and dividing that sum by how much you make over the same period before taxes are applied. The ideal is a low debt to income ratio - 43% or less, according to the Consumer Financial Protection Bureau. A DTI of 43% is usually the maximum to still be considered eligible for a jumbo loan.

Is a jumbo loan better than a conventional loan?

There's a common saying in the housing industry: All real estate is local.

In other words, what's considered the norm or the rule all depends on where you are, both in geographic location and financial circumstances. With this in mind, there's no such thing a jumbo vs conventional loan being better than the other. If you're in a comfortable situation financially and live in a city where the cost of living is high, a jumbo loan may be ideal. However, if you're just starting out, a conventional loan may be up your alley.

By talking it out with your mortgage loan officer, you'll discover together which mortgage is the best fit for you.


Understanding Mortgages

Rendering of a home with trees around it

Buying a second home: A brief primer on a long-term investment

If you are considering purchasing a second home, you may be wondering how the process works and if it's something you can actually pursue, based on your finances, credit score, existing mortgage rates and other factors that help determine your eligibility. Regardless of the purpose for which you seek to purchase a second home, you may be wondering how the process works.

 

By the end of this article, you should have a better idea on whether buying a second home is a worthwhile consideration for you and your family.

 

Before getting into the specifics, it's helpful to get a better lay of the second-home land, in terms of how many are in the nation's inventory and where they actually exist. According to data released by the National Association of Home Builders in December 2018, second homes in the U.S. total 7.4 million. That figure, of course, can change even on a monthly basis, depending on the level of construction activity going on at any given time, but it at the very least gives you a ballpark estimate as to their numbers.

Perhaps unsurprisingly, a large share of vacation properties are located in Florida. Indeed, the Sunshine State is home to 1.1 million second homes, which amounts to 15% of the nation's overall total. An additional 35% are found in California, New York, Michigan, Arizona, Pennsylvania, Texas and North Carolina. And from a county perspective, Maricopa - located in the Grand Canyon State of Arizona - is home to over 113,500 second homes, more than any other single county, with Florida's Palm Beach and Broward Counties rounding out the top three.

How do you qualify to buy a second home?

Now that you know the hard data, you may be curious about qualification and if it's fundamentally different from the steps involved with buying a primary home. The truth is no two home loan processes are identical. Every buyer has unique circumstances, which is why lenders prefer to have as much financial data on a borrower as possible so they can get a clear picture.

That said, there are a few rules of thumb to better determine your eligibility. For the most part, lenders view mortgages on second homes as not necessarily risky but still higher-risk loans. That's because, as the name implies, these mortgages are often taken out in addition to ones that are already in effect. As a result, qualification standards tend to be more stringent. Your credit score is a classic example. A higher FICO® score suggests borrowers are keeping up with their payments, which may enable them to obtain a lower interest rate.

Your debt-to-income ratio is something else your lender will want to check. This measure assesses how much of your gross monthly earnings go toward paying ongoing expenses. It's pretty easy to figure out if you don't already know it. All you do is take the sum of how much you spend on monthly debt and divide it by how much you make in earnings over the same period before taxes. The lower the resulting percentage, the better. Generally speaking, lenders prefer to see a DTI of 41% or less, but even here, you may have some wiggle room, depending on the size of the loan you're requesting and some of your other financial particulars.

Is a down payment mandatory for a second home?

Most loan programs require that a certain percentage of the house's list price be paid up front. There are some exceptions to this, such as if you're a first-time homebuyer and serve in the military, as VA loans typically do not necessitate a down payment. When buying a second home, though, down payments are mandatory. Generally speaking, expect the down payment to be at least 10% of the purchase price, although some lenders may require it to be larger, the most common being 20%. The amount may depend, in part, on your credit score; the higher it is, the lower the down payment requirement.

 

For many people, buying real estate is the biggest financial decision they'll make in their lifetime. So it's especially important to go into the second-home purchase process with your eyes wide open.

 

What else do I need to know about buying a second home?

If you’re considering renting out your vacation home to tenants, there are income tax implications. It’s important to consult with a tax or financial advisor beforehand so you know what to expect.

It's a lot to think about, but we're here for you. Whether looking at a second home as a vacation property or a second residence for the sake of work, or another reason entirely, it's a good idea to start a conversation with your favorite mortgage loan officer.

Second homes and investment properties
with Residential Mortgage Services

 


Understanding Mortgages

Women using a tablet in a park

How to get an FHA mortgage: A guide for homebuyers

Whether in the city, suburbs or perhaps someplace more rural, owning a home is something virtually everyone sees themselves doing at some point. But when you have a family to support, are on your own for the first time or simply don't have enough saved to use toward a down payment, circumstances of the moment can make homeownership seem like a pipe dream.

An FHA mortgage can help bridge the gap so you can live out your aspirations. Backed by the Federal Housing Administration, FHA loans are available through most mortgage providers and are ideal for individuals who have steady income, but may lack certain other financials that are asked for when filling out a loan application. For example, if your credit score is less than perfect or you can't afford a 20 percent down payment toward a property's purchase price, a loan from an FHA lender can make a lot of sense.

That said, there are a few key aspects that must be fleshed out in order to qualify for an FHA loan. Here, we'll address these elements, as well as a few other important considerations so you can qualify for an FHA on the first try.

How does an FHA mortgage compare to a conventional mortgage?

FHA loans are a lot like conventional loans, in that you can buy them with fixed-rate or adjustable-rate interest - typically in 15-year and 30-year increments - and require an initial down payment, among other similarities. However, the approval process isn't as stringent for an FHA mortgage versus a traditional loan product. For example, instead of a 20 percent down payment, you can put as little as 3 percent down, which is slightly less than what the average is these days (5 percent), according to the National Association of Realtors.

What you spend in interest is largely determined by your credit history, meaning how reliable you are at making your payment on time. Here as well, FHA loans have looser credit restrictions than conventional mortgages. Generally speaking, FHA loans require a minimum credit score to be close to 600.

However, should your down payment be larger - say 10 percent or 15 percent - you may be approved with a FICO® score that's a bit lower. It's worth noting that any down payment that's less than 20 percent requires the purchase of mortgage insurance, which we'll discuss a bit further later on.

Another key distinction FHA loans have versus conventional loans are interest rates. FHA rates are typically lower than conforming loans. But again, your creditworthiness - among other financial characteristics - will factor in to how much you can expect to spend in interest, which is also influenced by market dynamics that are almost constantly in flux.

Calculator with images indicating home, groceries, car and vacation

What should my debt-to-income ratio be?

You've probably heard about debt-to-income ratio, but if you're new to homeownership, you may not be exactly sure what it means. It's pretty straightforward: It basically is an assessment of how much of your gross income goes toward monthly payment expenses. You can calculate this through the use of mortgage calculators, but you can also do it on your own by simply dividing the totality of your monthly debt payments (i.e. installment and revolving, not including household utilities) by what you earn in the typical month, before taxes are taken out. Multiplying the answer by 100 will give you a percentage, which is your DTI.

In order to be approved for an FHA loan, the DTI should be no higher than 43 percent, which is an indication that less than half of your monthly earnings are put toward existing expenses. The lower your DTI, the more likely it is you'll be approved, with the ideal ratio being between 28 percent and 36 percent. However, it's important to emphasize that no single factor will be the deciding one as to whether you'll be given the green light. Lenders take into account the totality of your financial and employment situation.

What's the deal about mortgage insurance?

Although there are exceptions, such as with VA loans, mortgage insurance is typically required on any loan where the down payment is less than 20 percent of the purchase price. This rule applies to FHA loans, regardless of how much money you use toward the upfront cost. Mortgage insurance is included in your monthly mortgage payment. FHA requires mortgage insurance for the life of the loan unless you are able to refinance due to an increase in equity.

What else should I know about FHA loans?

Perhaps the best aspect of loans backed by the FHA is they offer a tremendous amount of flexibility. For example, say that you're able to put 3 to 5 percent toward the down payment of a home, but you'd like to put more money toward the cost so you can pay off your mortgage more quickly. If you've received gift money from a parent or, close friend or relative, you can use these funds so you can pay off a bigger chunk. These gift funds can be used in conjunction with what you spend or can cover the cost in its entirety.

Lastly, you may be wondering the maximum loan amount you can be approved for with an FHA mortgage. The amounts have changed from year to year, and in 2019, the ceiling rose to $726,525, HousingWire reported. That's up from $679,650 in 2018. With the median value for a property among all housing types nearing $250,000, according to the most recent estimates from the NAR, the new maximum loan amount is certainly sufficient to cover the cost of the majority of houses up for sale.

Homeownership is the American dream. The flexibility and payment options available with an FHA loan can help turn those dreams into reality. With the home buying season rapidly approaching, getting in touch with your favorite loan officer to learn more, and let the search begin!


Understanding Mortgages

Illustration of a suburban house

First-time home buyer loan programs: What are the options?

No matter where you are in life - a recent college grad, newlywed or just someone who is finally ready to make the leap - first-time homeownership is a big decision. According to the National Association of Realtors (NAR), roughly 33% of the market is composed of first-timers, a share that's remained fairly consistent over the past several years. That's a significant figure and it's understandable, given that buying a house is something that most people hope to accomplish at some point.

Regardless of your situation, you probably have lots of questions which, stacked on top of one another, might rival the height of a skyscraper: How much can I afford? Should I live in the country or the city? What is the application process like? Who are the mortgage lenders and which should I choose? What will my interest rate be? Are there any assistance programs available? You get the picture - and that's just a few of the burning questions first-time buyers may ponder. 

Here's the good news: As numerous as your questions may be, almost equally as abundant are your options, particularly when it comes to loan programs. So, which one should you choose? Here are the details on a few of them that can help guide your decision:

FHA Loans

Backed by the Federal Housing Administration, FHA loans are among the more popular options, particularly for first-time buyers. The reason for this is the qualification standards are a bit looser compared to others. Although the FHA operates the program, FHA loans are sold through private lenders.

Perhaps the most attractive aspect of FHA loans, aside from their wide availability, is the fact that many people are eligible. For example, even if your credit score is lower than what's considered ideal, that isn't always a deal breaker. Furthermore, you're not expected to come up with a sizeable down payment, as this can be as low as 3.5% of the purchase price.

USDA-RD Loans

Another government-backed mortgage option is the program run by the U.S. Department of Agriculture. Similar to FHA loans, USDA-RD loans are sold through private lenders and are geared toward homebuyers whose incomes are considered low to moderate. You fall into this bracket if your combined household income is between 50% and 80% of the median salary in your geographic area, as defined by the Department of Housing and Urban Development.

They're a loan type ideal for first-time buyers, but USDA-RD loans are exclusively for those who live in rural parts of the U.S. What defines "rural"? There's actually no official definition, but generally speaking, according to the Census Bureau, it's any place that is not considered a metropolitan statistical area (MSA). From a geographical perspective, MSAs are the exception, not the rule, so even if you don't think you live in a rural enclave, don't discount your eligibility. Why? Because 97% of the U.S. populace resides in a location the USDA-RD loan program covers.

Here's another attractive aspect of USDA-RD loans: a down payment is optional. Surveys by the NAR show that the down payment is often the biggest obstacle for prospective buyers; USDA-RD loans help make homeownership possible. That said, there are a few prerequisites in order to be considered eligible. Your FICO® score (that's your credit score) and household income must meet a certain total, depending on the size of your family. The more there are of you, the more you're able to earn.

Keep in mind that even though you're not required to make a down payment with a USDA-RD loan, you are expected to purchase mortgage insurance. Even here, though, premiums tend to be more affordable compared to traditional loan products.

Conventional 3% Down

Otherwise referred to as a conventional 97 LTV (loan-to-value) mortgage, the 3% down loan program is aptly named, because it's custom-made for individuals who may not be able to afford a large lump sum going toward the down payment. Developed by Fannie Mae and Freddie Mac, the conventional 97 program requires an upfront expense of just 3% of the home's value, which is lower than the mandatory amount for FHA loans. As noted on Fannie Mae's website, there are a few other eligibility standards to be mindful about. It's for fixed-rate mortgages only, as opposed to adjustable rate mortgages, and the requested loan amount can't be higher than $484,350. Additionally, while repeat buyers are free to apply, it has to have been at least three years since you last were a homeowner.

VA Loans

If you're an active or retired member of the military, you may be uniquely qualified to apply for an affordable mortgage product thanks to the Veterans Administration. VA loans are backed by this government department but sold through most private lenders. As with USDA-RD loans, they do not necessitate a down payment. VA loans are available to individuals who serve or have served in any of the five military branches - Army, Navy, Air Force, Marines, Coast Guard - or reserves, for a period of at least 90 days at wartime or 181 during peace. Closing costs and monthly payments tend to be more affordable with VA loans as well.

What type of loan is the best option for a first-time buyer?

Given that there are so many mortgage options to select from, you may wonder which is the very best. When it comes down to it, there's no one-size-fits-all answer. Everybody's situation is different and not only that, participating lenders vary. Assistance programs aren't universally available either. That's why it's so important to consult with a mortgage professional who is well-positioned to assess your specific situation and go from there.

Armed with this information, you can enter the market with a better idea of what loan to go with and what you can expect as far as qualification is concerned. Contact your local RMS loan officer for a free consultation.


Understanding Mortgages

Young couple meeting with a loan officer

How first-time home buyers can secure a mortgage

First-time home buyers represent a substantial portion of the property seeking public. Accounting for roughly one-third of sales at any given point in the typical year, according to the National Association of Realtors, every first-time home buyer enters the market with the hopes of realizing the American dream - ideally at an affordable price.

But buying a home on a budget may seem easier said than done. Fortunately, there are a variety of opportunities that you can take advantage of to buy a home you've set your sights on.

What do you need when applying for a mortgage?

After you've taken a look at some of the listings in your area and seen what the prices are, you'll need a mortgage provider so you can apply for a loan. Lenders are quite plentiful, so you'll have plenty of options to choose from. Whoever you go with, they'll need to see some information to determine your financials. Some of the items to gather include your credit report, pay stubs from the last few weeks, a bank statement of available funds and a copy of your federal tax returns.

Your lender will pull a credit report. Your credit report, which you can also obtain from any of the three credit bureaus for free, offers a window into your payment history. They'll be looking to see if you take care of bills on time as well as if you have any debt. The higher your score, the more likely it is you'll be approved. Generally speaking, a FICO score of 740 or above is the ideal. Borrowers are approved with lower scores, but chances are greater that you'll get a lower mortgage rate with a strong score.

Is there a program for first-time home buyers?

Would-be buyers - regardless of whether they're first-time or not - come to the process with unique needs. Understanding this, there are many mortgage options to choose from. One of the more popular types for first-time buyers - including low-income families - are FHA loans. Backed by the Federal Housing Administration, FHA loans are often ideal if you're a new buyer because down payment requirements are lower.

For example, borrowers for other loan programs and products may need to spend 20 percent of the home's value as the down payment, as may be the case for a jumbo loan. Not so with FHA loans. Down payments as low as 3.5 percent are available. Additionally, FHA loans can be worthwhile to people with less-than-sterling credit.

Of course, conventional mortgage loans shouldn't be overlooked. There are conventional loan programs that allow for down payments as low as 3 percent.

Another option are VA mortgage loans. The Veterans Administration issues these through private lenders and as their name suggests, they're exclusively for active and former members of the armed services. Applicants don't need to come up with a down payment, nor do they need private mortgage insurance. Typically, mortgage insurance is necessary when down payments are less than 20 percent.

The path to homeownership is paved with possibilities. Getting your finances in order and understanding some of the terminology - such as loan-to-value ratio and debt-to-income ratio - can help you reach a successful destination. Your mortgage lender can help you understand this kind of terminology.

 

There are even more first-time home buyer options available than mentioned above, and great tools to help you discover what kind of mortgage program is going to work best for you. Reach out to your favorite loan officer today to ask your questions and get started!

 


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