🏡 The Ultimate Guide to Mortgage Loan Types in NJ & PA (Plus Bonus Tips Most People Miss)

Whether you're buying your first home, upgrading to your dream house, or investing in real estate, understanding your mortgage options is mission-critical. The type of loan you choose impacts your approval, interest rate, down payment, and even how competitive your offer is in fast-moving markets like Mercer County, NJ and Bucks or Montgomery Counties, PA.

Let's break down the 5 key loan types—Conventional, Jumbo, FHA, DSCR, and Bank Statement—plus important extras like gift funds, co-signing strategies, and how Fannie Mae and Freddie Mac impact your options.

📘 Who Are Fannie Mae and Freddie Mac—and Why Should You Care?

Fannie Mae (FNMA) and Freddie Mac (FHLMC) are government-sponsored enterprises (GSEs) that buy and guarantee most conventional loans in the U.S.

When you hear a lender say your loan needs to "meet Fannie/Freddie guidelines," here's what that really means:

• Fannie Mae and Freddie Mac do not issue loans, but they buy loans from lenders so those lenders can fund more mortgages.

• To be eligible, your loan must fall within conforming limits (e.g. $766,550 max in most counties for 2024), and meet credit, income, and documentation standards.

• They drive most of the rules around:

• Debt-to-income ratio (typically capped at 45%)

• Minimum credit scores

• Asset and income verification

• Guidelines on gift funds and co-signers

If your loan doesn't meet these standards, it's considered non-conforming (i.e. jumbo, DSCR, bank statement loans).

1. Conventional Loans

Best for: Buyers with strong credit, stable income, and a decent down payment.

What it is:

A conventional loan is not backed by the government and usually requires:

• Minimum credit score of 620

• Down payment of 3%–20%

• Debt-to-income ratio under 45%

Pros:

• Lower rates for well-qualified buyers

• Can avoid mortgage insurance with 20% down

• Widely accepted for various property types

Cons:

• Stricter income and credit standards

• Limited flexibility for self-employed or newer earners

📍Example in NJ/PA: Buying a $425,000 home in Ewing, NJ or Yardley, PA with 20% down? A conventional loan is likely your most cost-effective path, with lower monthly payments compared to FHA.

2. Jumbo Loans

Best for: Buyers purchasing higher-priced homes that exceed conforming loan limits.

What it is:

A jumbo loan exceeds the Fannie Mae/Freddie Mac limit, which in 2024 is:

• $766,550 for most areas (including Mercer, Bucks, and Montgomery Counties)

These loans aren't backed by government agencies, so they come with stricter requirements.

Requirements:

• 700+ credit score

• 10%–20%+ down

• Significant cash reserves

Pros:

• Enables purchases of luxury or high-value properties

• Competitive rates for top-tier borrowers

Cons:

• Tighter underwriting and more documentation

• Typically higher closing costs

📍Example in NJ/PA: Buying a $1.1M home in Princeton, NJ or New Hope, PA? You'll be in jumbo loan territory and need a strong financial profile.

3. FHA Loans

Best for: First-time buyers or buyers with lower credit scores or small down payments.

What it is:

A loan insured by the Federal Housing Administration (FHA) that allows:

• 3.5% down payment (with 580+ credit score)

• Flexible income and debt qualifications

Pros:

• Lower barrier to entry for new buyers

• Allows gift funds for down payments

• Can be used after financial hardship (e.g. bankruptcy)

Cons:

• Mandatory mortgage insurance (MIP) for the life of the loan

• Property must meet certain livability standards

• FHA loan limits vary by county

2024 FHA Loan Limits:

📍Example in NJ/PA: Buying a $350,000 home in Trenton or Levittown with minimal down payment and a 620 score? FHA is your friend—but expect to pay monthly mortgage insurance.

4. DSCR Loans (Debt-Service Coverage Ratio Loans)

Best for: Real estate investors who want to qualify based on the property's cash flow, not personal income.

What it is:

A non-QM (non-qualified mortgage) loan that focuses on the property's rental income versus its expenses. Your personal income isn't verified.

Key Metric:

DSCR = Monthly Rental Income / Monthly Mortgage Payment
A DSCR over 1.0 means the property pays for itself.

Pros:

• No tax returns or W-2s

• Fast closings and flexible underwriting

• Great for LLC purchases

Cons:

• Higher interest rates

• Larger down payment (20–25%)

• Must prove solid rent potential

📍Example in NJ/PA: Buying a 4-unit in Trenton or a triplex in Bristol? If it rents for $4,000/month and your mortgage is $3,200/month, your DSCR of 1.25 makes this loan a strong option—even if your taxes show minimal income.

5. Bank Statement Loans

Best for: Self-employed borrowers, business owners, freelancers, and gig workers with strong cash flow but unconventional tax filings.

What it is:

A non-QM loan that uses 12 to 24 months of bank statements (business or personal) to calculate your income.

Pros:

• No W-2s or tax returns required

• Ideal for self-employed or commission-heavy earners

• Available for primary, secondary, or investment properties

Cons:

• Higher rates than traditional loans

• Down payment requirements (often 10%–20%)

• Not offered by all lenders

📍Example in NJ/PA: A self-employed contractor in Bordentown or Doylestown who earns well but shows minimal net income on tax returns can qualify based on deposits in their business account.

💵 Gift Funds: How They Work and What's Allowed

✅ What's Allowed:

• Gifts must come from a relative, spouse, domestic partner, or fiancé(e)

• A signed gift letter is required stating the funds don't need to be repaid

• The donor must show the source of the gift (bank statement or wire)

• In some cases, the entire down payment can be gifted

❌ What's Not Allowed:

• Gifts from sellers, real estate agents, employers (unless through a verified program)

• "Repayable" gifts (which are considered loans)

📍Example: A parent gifts you $30,000 for a down payment in Hopewell, NJ. With the right documentation, this is 100% allowable—even if it covers your full 5% down on a conventional loan.

👥 Co-Signing & Debt-to-Income (DTI) Exclusions: A Strategic Move

✅ Fannie Mae & Freddie Mac DTI Rule:

If you co-signed on a loan but can prove that someone else has made the last 12 months of payments from their own account, that debt does NOT count against your DTI.

Proof Required:

• 12 months of canceled checks or bank statements showing someone else paid the bill

• Clear evidence that it didn't come from your account

📍Example: You co-signed on your brother's car loan, but he's made every payment from his account for the past year. That monthly payment will not be counted against your mortgage pre-approval. This can significantly increase your buying power.

✅ Mortgage Loan Types (Recap with Gift & Co-Signer Info)

🏑 Final Word: The Right Loan is a Strategic Weapon

In markets like NJ and PA where every deal is competitive, choosing the right loan isn't just a financial decision—it's a negotiating tactic. If your offer is delayed because you're underqualified, or you didn't optimize your DTI, you could lose out.

The good news? You don't need to figure it out alone.

📞 Let's Talk Strategy
The Terebey Relocation Team works hand-in-hand with top lenders in NJ and PA who understand every loan nuance—from gift funds to DSCRs to Fannie/Freddie quirks.

Let us help you:

• Maximize your pre-approval

• Position your finances for underwriting success

• Find the best loan product for your goals