There are two factors borrowers considering a home must understand: Rates on conforming loans continue to increase, while, as of last week, rates for jumbo, or non-conforming, mortgages actually dropped below. After reaching 4.57 percent last week, the rate for 30-year, conforming conventional loans went down to 4.49 percent this week, but that’s still a steep increase from the beginning of 2013.
Because of this, some mortgage market analysts talk how adjustable rate mortgages, frequently characterized by lower starter rates and as ideal for properties borrowers don’t plan to own long term, are a more practical option. Although both these and jumbo loans experienced a moderate resurgence this year, 30-year, conforming conventional mortgages continue to remain the “stable” option – and a solid choice for borrowers planning to live for more than five years in a property.
Unfortunately, a good deal of borrowers don’t always know what they’re getting into with certain mortgage programs. If a lender like McCue Mortgage approved you for a 15- or 30-year conforming conventional loan, which points should you keep in mind?
Government Sponsored Enterprise (GSE) guidelines essentially determine if a loan is conforming or not. Set by the Office of Federal Housing Enterprise Oversight and used by Fannie Mae and Freddie Mac, guidelines specify the following:
• Maximum debt-to-income ratio, which is up to 45 percent
• Maximum loan-to-value ratio
• Documents a borrower must bring
• Credit score and history, which is typically 620 and above
• Maximum home price
For the latter of these, most conforming loans go up to $417,000 for a single-family property, $533,850 for a two-family property, $645,300 for a three-family property, and $801,950 for a four-family property. However, in high-cost areas, the conforming limit for a single-family property is raised to $624,000.
It’s considered common knowledge that most conventional loans require a 20-percent down payment, especially as lenders must follow stringent standards. However, this figure isn’t always the case.
It is expected that borrowers be able to make a five-percent minimum down payment. Or, for certain conventional conforming home improvement loans, just three percent is necessary.
Keep in mind, too, that the upfront payment for a conventional loan exceeds beyond the down payment. While insurance and interest rates may be lower than those for government loans, borrowers are still expected to purchase private mortgage insurance.
A 30-year, conforming conventional loan has appeared as the holy grail of stability, especially after the housing market crash, and borrowers stuck paying off non-conforming mortgages (such as the subprime mortgages extremely popular before that point) may have the option to refinance.
Although the process is difficult, particularly if you have an underwater mortgage and no equity, refinancing from an ARM with increasing interest and payments to a conventional conforming option leads to lower interest, more consistent payments, and long-term savings.