Conventional mortgage loans are less flexible than sub-prime mortgage loans. Conventional loans have strict rules about loan amounts, terms, and PMI requirements. These rules are set by Freddie Mac and Fannie Mae. With subprime mortgages, if the rates go up, lenders can offer more options.
What a conventional loan can't do
People often want conventional loans because they have low rates. But there are some rules that come with these low rates. After a financial company has processed a mortgage, Freddie Mac and Fannie Mae buy it. This gives the lender more money to lend out. But Fannie Mae and Freddie Mac have strict rules about what kinds of loans they will buy.
Loan amounts are one of these restrictions. In 2006, a single-family house could only cost up to $417,000. Each year, these caps are looked at again. If you borrow more than 80% of the home's value, you also have to get private mortgage insurance with a conventional home loan.
To get a conventional mortgage, you need to have good credit, cash on hand, and a history of steady employment.
What You Can Do With A Sub-Prime Loan
Sub-prime home loans are a way for people with bad credit or unusual application terms to get money to buy a house. This can include jumbo loans, which are bigger than a standard loan. People whose jobs are unusual or hard to predict may also find it easier to get a loan from a sub-prime lender.
The terms of a subprime mortgage are set by each lender. So you can get a loan with no money down even if you have bad credit. You can also get rates close to the market if you make a big down payment at closing. With a sub-prime mortgage, you don't have to pay for private mortgage insurance, which could save you hundreds of dollars a year in premiums.
How to Get the Right Loan for You
Most loan companies offer both kinds of loans, so it's easy to get quotes for both. You have to take the time to do the math to find the right mortgage.
Check the APR to find out how much the loan will cost all together. But also think about whether you plan to move or change your mortgage in the future. You don't want to pay big application fees for low rates that won't save you money if you pay off your home loan in a few years.
