Government Mortgage Programs
The Federal Housing Authority (FHA) is part of the U.S. Department of Housing and Urban Development (HUD). With the mortgage industry tightening their lending requirements, the FHA loan has often become the option of choice for many buyers – not just first-time buyers and others who would not qualify for a conventional loan. Interest rates on FHA loans are usually in step with the going market rate, but the down payment requirements for FHA loans are much lower than for conventional loans. The required down payment can be as low as 3.5 percent and the closing costs can be included in the mortgage amount.
VA (Veterans Affairs) Loans are guaranteed by the U.S. Department of Veterans Affairs and are available only to U.S. armed service personnel and veterans. Typically VA loans usually offer a competitive fixed interest rate, require NO down payment and only limited closing costs. While the VA does not issue the loan, it does issue a certificate of eligibility required to apply for a VA loan.
RHS Loan Programs
The Rural Housing Service (RHS), a part of the U.S. Department of Agriculture, guarantees loans from private lenders to help low- to moderate- income families qualify for mortgages.
Private Sector Mortgage Programs
There is a wide selection of non-government mortgage loans. Government backed loans are secured by the value of the property AND the assurance that the government will protect the lender from loss in case of default on the loan. Conventional loans are only guaranteed by the value of the property. Here are descriptions of some of the most common private sector loans.
Conventional loans that follow the terms and conditions established by Fannie Mae and Freddie Mac are called conforming loans. The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a publicly-traded government-sponsored enterprise whose purpose is to expand the mortgage market by packaging numerous mortgages into one mortgage-backed security (MBS) that can be then sold to investors. Lenders can then use the proceeds from the sale of the mortgages to fund additional mortgages. Confusing as that may sound, it translates to more mortgages available to home buyers. The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is also a public government-sponsored enterprise that buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. Just as with Fannie Mae, this provides local lenders with more money to lend in the form of mortgages. Some of the types of conventional mortgage loans are:
The interest rate and the principal payments remain fixed throughout the loan. Your monthly escrow account payment could vary from year-to-year as taxes and insurance rates change.
Variable or Adjustable-Rate Mortgage
The interest rate on the loan is not fixed, but rather fluctuates over the period of the loan based on a publicly known index, such as the Consumer Price Index. The loan’s interest rate is determined by adding a fixed number of points to the defined index. Typically variable rate mortgages are attractive because they usually have a low interest rate for an initial period of a few years. After the initial period, the interest rate will move up or down based on the index.
A balloon loan is a short term, fixed-rate mortgage that has monthly payments usually based on a 30-year amortization schedule and a lump sum payment (balloon payment) due at the end of a term, usually 3, 5 or 7 years. The interest rate on balloon loans is usually less than a 15- or 30-year fixed-rate mortgage.
Piggyback Loan/ Secondary Mortgage
This is a second mortgage that is made along with the first mortgage. Often the first mortgage is for 80% of the purchase price and the “piggyback” is for 10% of the purchase price. The home buyer covers the remaining 10% with their down payment. (Some lenders will write a second mortgage of 10% or even 15% of the purchase price.) However, VERY FEW LENDERS are offering secondary mortgages due to the volatility of the market.
Housing Finance Agencies
These agencies offer special loan programs to low- and moderate-income buyers, buyers interested in rehabilitating a home in a targeted area, and other groups as defined by the agency. By working through a housing finance agency, you can receive a below-market interest rate, down payment assistance, and other incentives.
B/C Jumbo Loans
Loans for amounts above the maximum amount established by the guidelines of Fannie Mae and Freddie Mac are referred to as jumbo loans. Often the interest rate charged for a jumbo or non-conforming loan is higher than that of a conforming loan.
Loans for borrowers who cannot meet the credit guidelines established by Fannie Mae and Freddie Mac are referred to as sub-prime or B/C loans, loans that would be classified as “B” or “C” quality. The purpose of these loans is to offer temporary financing to buyers whose credit history disqualifies them for a conforming loan (including buyers who have recently filed for bankruptcy, foreclosure or have late payments on their credit report). Typically the interest rates are higher than conforming loan rates, and vary depending upon the individual credit situation.