Conventional loans are mortgage loans offered by non-government sponsored lenders. These loan types include:
Fixed Rate Loans
Adjustable Rate Loans (ARMs)
Combination (Hybrid) Loans
Balloon Mortgages and Pledge Asset Loans
Jumbo / Construction Loans
FHA mortgage loans are issued by federally qualified lenders and insured by the U.S. Federal Housing Authority, a division of the U.S. Department of Housing and Urban Development.
FHA loans are an attractive option, especially for first-time homeowners:
Generally easier to qualify for than conventional loans.
Lower down payment requirements.
Cannot exceed statutory loan limits.
Conforming loans are conventional loans that meet bank-funding criteria set by Fannie Mae (FNMA) and Freddie Mac (FHLMC). Both of these stock-holding companies buy mortgage loans from lending institutions and secure them for resale to the investment community. Every year, form October to October, Fannie Mae and Freddie Mac establish limits on what constitutes a conforming loan in a mean home price.
Buying back mortgage loans allow these agencies to provide a continuous flow of affordable funding to banks that reinvest their money back into more mortgage loans. Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market – effectively decreasing the demand for non-conforming loans.
Designed to offer long-term financing to American veterans, VA mortgage loans are issued by federally qualified lenders and are guaranteed by the U.S. Veterans Administration. The VA determines eligibility and issues a certificate to qualifying applicants to submit to their mortgage lender of choice. It is generally easier to qualify for a VA loan than conventional loans.
Here’s how it works:
100% financing without private mortgage insurance or 20% second mortgage.
A VA funding fee of 0 to 3.3% (this fee may be financed) of the loan amount is paid to the VA.
When purchasing a home, veterans may borrow up to 100% of the sales price or reasonable value of the home, whichever is less.
When refinancing a home, veterans may borrow up to 90% of reasonable value in order to refinance where state law allows.
RHS Loan Programs
The U.S. Department of Agriculture offers a variety of programs to help low to moderate-income individuals living in small towns or rural areas achieve homeownership. The Rural Housing Service (RHS) helps qualifying applicants, who cannot receive credit from other sources, purchase modestly priced homes as their primary residence.
RHS Loans are an attractive option because:
Minimal closing cost
Low or no down payment
RHS loans can be used toward the purchase and renovation of a previously owned home or a new construction. Families must be able to pay their monthly mortgage, homeowner’s insurance and property taxes.
State and Local Housing Programs
Many state, county and local government programs offer financing for qualifying low-to-moderate income families wishing to purchase their first home. Loan assistance programs like Mortgage Credit Certificate (MCC) offer a partial tax credit for interest on the loan.
These programs typically offer:
More relaxed qualifying guidelines
Lower upfront fees
Lower interest rate
Jumbo Loans exceed the maximum loan amounts established by Fannie Mae and Freddie Mac conventional loan limits. Rates on jumbo loans are typically higher than conforming loans. Jumbo Loans are typically used to buy more expensive homes and high-end custom construction homes.
B/C Loans do not meet the credit requirements of Fannie Mae and Freddie Mac. They are known as B, C and D paper loans. Loan applicants typically have a bad credit history, have filed for bankruptcy, or have had a property in foreclosure.
B/C Loans are often issued as temporary loans until the applicant can restore credit and qualify for conforming “A” loans. Interest rates on B/C Loans are generally higher than for conforming “A” loans.
Location Efficient Mortgage (LEM)
Location Efficient Mortgages are available to individuals purchasing more expensive homes in areas where with efficient public transportation systems. These loans take into account monies saved on the expenses related to owning or leasing automobiles.
LEM loans are only available in certain markets:
Los Angeles, CA
San Francisco, CA
Fixed Rate Mortgage
With a fixed rate mortgage, the interest rate does not change for the term of the loan, so the monthly payment is always the same. Typically, the shorter the loan period, the more attractive the interest rate will be.
Payments on fixed-rate fully amortizing loans are calculated so that the loan is paid in full at the end of the term. In the early amortization period of the mortgage, a large percentage of the monthly payment pays the interest on the loan. As the mortgage is paid down, more of the monthly payment is applied toward the principal.
A 30 year fixed rate mortgage is the most popular type of loan when borrowers are able to lock into a low rate.
Lower monthly payments than a 15 year fixed rate mortgage
Interest rate does not go up if interest rates go up
Payment does not go up, it stays the same for 30 years
Higher interest rate than a 15 year fixed rate mortgage
Interest rate stays the same even if interest rates go down
A 15 year fixed rate mortgage allows you to pay off your loan quicker and lock into an attractive lower interest rate.
Lower interest rate
Build equity faster
If interest rates go up, yours is fixed
Drawbacks: Higher monthly payment stays the same if interest rates go down
Interest rate stays the same even if interest rates go down.
Adjustable Rate Mortgage (ARM)
An ARM is a mortgage with an interest rate that may vary over the term of the loan — usually in response to changes in the prime rate or Treasury Bill rate. The purpose of the interest rate adjustment is primarily to bring the interest rate on the mortgage in line with market rates.
Mortgage holders are protected by a ceiling, or maximum interest rate, which can be reset annually. ARMs typically begin with more attractive rates than fixed rate mortgages — compensating the borrower for the risk of future interest rate fluctuations.
Choosing an ARM is a good idea when:
Interest rates are going down
You intend to keep your home less than 5 years
ARMs have the following distinguishing features:
Initial Interest Rate
Interest Rate Caps
Combined/Hybrid ARMs are a combination of fixed rate and adjustable rate loans: Fixed-Period ARMs.
Borrows often lock into 3 to 10 years of fixed rate payments before the initial interest rate change. At the end of the fixed period, the interest rate adjusts annually. Fixed-period ARMs are typically tied to the one-year Treasury securities index: 3/1, 5/1, 7/1 and 10/1.
ARMs with an initial fixed period beside of lifetime and adjustment caps usually have also first adjustment cap. It limits the interest rate you will pay the first time your rate is adjusted. First adjustment caps vary with type of loan program.
The advantage of these loans is that the interest rate is lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time.
Balloon Loans offer a fixed rate for a specified time period, typically 5 or 7 years, and then adjust to the current market rate. After the adjustment the mortgage stays at the new fixed rate for the remainder of the loan period. Graduated Payment ARMs.
Graduated payment mortgages initially offer lower payments at the start of the loan that gradually increase at preset times. Lower initial payments allow borrowers to qualify for a larger loan amount. Loan amounts negatively amortize during the early years of the loan then pay off the principal at an accelerated rate through the later years.
GPM payment plans will vary by rate of payment increases and number of years over which payments will increase. The greater the rate of increase, or the longer the period of increase — the lower the initial mortgage payments.