You are ready to shop for the home of your dreams, but you first want to receive pre-approval for a mortgage loan. We understand that the number of choices you have for a mortgage lender can seem overwhelming. This blog highlights common mortgage lenders outside of federal government programs along with some general information all homebuyers should know.*
What is a Conventional Mortgage Loan?
A conventional mortgage loan is any loan not offered or backed by the government. Because the lender assumes the full risk when making the loan, you can expect more stringent qualification requirements.
Lenders offering primary mortgage loans typically follow the guidelines set by the Federal Home Loan Mortgage Association (Freddie Mac) and/or the Federal National Mortgage Association (Fannie Mae). These organizations are associated with the federal government but not formally operated by it.
Lenders offering conventional mortgage loans usually require applicants to have good to excellent credit with a score of at least 640. Other common qualification requirements include:
- Proof of steady job history
- No major credit report issues such as home foreclosure or bankruptcy
- A down payment of at least three percent, however, every lender and program is different so down payment requirements up to 20% are not uncommon
- Total loan amount not to exceed $726,200 or $1,089,300 in areas with a higher cost of living
- A debt-to-income ratio of less than 43 percent, although this requirement may be lower if you have any credit issues
Understanding Interest Rate Structures
Conventional mortgage lenders generally offer the following interest rate structures:
Adjustable-rate mortgage (ARM)
The interest rate on an ARM fluctuates over time with intervals ranging from six months to 10 years. Your ARM mortgage loan will specify a term to ensure you understand what to expect. A common practice among lenders offering an adjustable-rate mortgage is to guarantee that the rate will not change during the introductory period that could last up to several years. For example, an ARM listed as 7/1 keeps the same interest rate for the first seven years and changes each year after that until you have paid your mortgage in full.
With this type of mortgage, you pay the same interest rate throughout the life of your loan.
Mortgage Loan Options
Now that you understand the basics of obtaining a mortgage, read on to learn more about the various lending options available to you.
Commercial mortgage bankers
Professionals in this role work for one or more banks and funding for the mortgage loan comes from a bank. You typically cannot negotiate fees when you work with commercial mortgage bankers because the bank pre-determines the fee. One risk of working with commercial mortgage bankers is that they may not have a valid license since the only requirement is to register with a state registry.
Before the last recession and housing crisis, Americans chose to work with a mortgage broker about 25 percent of the time. The percentage is now around half of that. A mortgage broker acts as a middleman to bring borrowers and lenders together. Mortgage brokers can also be mortgage bankers. However, not all mortgage bankers are mortgage brokers.
When mortgage brokers offer upfront services to homebuyers, it means they negotiate a fee early in the professional relationship and then shop for the lowest closing fees and interest rate. The buyer, seller, or both can pay fees associated with closing the loan.
Some lenders that handle transactions such as retirement savings or investment accounts also offer online mortgages. You should have an excellent credit score and know exactly what you want in a mortgage loan before considering this option. Due to the large amount of funds changing hands, make sure the site is well-known and has a good reputation for mortgage lending and not just its other products.
Savings and loan associations
Savings and loan associations, or S&Ls, accept checking, savings, and money market deposits from customers and pay interest on those products. They also charge interest on loans, which is how they earn most of their revenue. The primary function of an S&L is to make home loans.
After the S&L crisis of the late 1980s, President George H.W. Bush signed significant reform legislation. Most savings and loan associations have operated under regulation from the Office of Thrift Supervision of the United States Treasury Department since that time. Obtaining a mortgage loan from an S&L can be an easier process than applying with a bank since home loans are their largest product.
People shopping for a mortgage loan often turn to the bank where they hold a checking or savings account. Commercial banks offer a wide range of services, although most do not focus on mortgage loans as their primary service.
Banks that do provide mortgage loans usually offer competitive interest rates to attract qualified borrowers. Sometimes banks provide a slight discount for customers who hold other accounts at the same institution. Qualification criteria can be very stringent, especially after the housing market collapse and recession from approximately 2007 to 2010.
Benefits of Obtaining Your Home Mortgage from a Credit Union
Credit unions offer attractive interest rates and mortgage terms compared to all other types of lenders. Because credit unions exist to serve members, any extra revenue generated goes back to members in the form of reduced loan rates or increased interest paid on savings products. Credit unions typically offer fixed-rate mortgages, and you can lock in a rate for at least 30 days as you shop for a new house.
You may still be able to get a mortgage loan with a credit union even if you do not have perfect credit. 1st Nor Cal encourages first-time buyers or repeat low-income or middle-income buyers to check with their city or county to determine if they have any financial resources available to help complete the home purchase.
With seven locations in northern California, 1st Nor Cal is here to serve your mortgage needs.
*1st Nor Cal Credit Union’s mortgage programs and policies may differ from what is expressed in this article. This article is presented as general information about home common home loan options available in the marketplace. For specific details on the programs offered by 1st Nor Cal Credit Union, please visit www.1stnorcalcu.org