A mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. FHA loans allow the borrower to borrow up to 96.5% of the value of the home. The 3.5% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time buyers.
In 1991 the U.S. Department of Agriculture (USDA) started offering rural development loans to encourage homebuyers to live in rural and suburban areas. The USDA did this to promote growth and boost the local economies of these areas by making land and property more affordable.
For borrowers that meet USDA loan requirements, they offer many benefits paired with relatively lenient approval requirements. Government backed and insured they offer:
- NO money down
- Low interest rates
- 30 year fixed rates
- Government guaranteed
- You have the ability to roll in your closing costs into the loan
- Flexible credit guidelines
So if you want to live in a suburban or rural area – generally with a population of 20,000 or less then a USDA loan may be your answer to owning your new home.
A mortgage loan program established by the United States Department of Veterans Affairs to help veterans and their families obtain home financing. The Department of Veterans Affairs does not directly originate VA loans; instead, they establish the rules for those who may qualify, dictate the terms of the mortgages offered and insure VA loans against default. VA loans offer up to 100% financing on the value of a home. To apply for a VA loan, borrowers must present a certificate of eligibility, which establishes their record of military service, to the lender.
Conventional Fixed Rate Loans
Mortgages that are not government-backed are known as conventional home loans.
- Conforming loans
- Non-conforming loans
- Jumbo loans
- Portfolio loans
Conforming loans conform to guidelines established by government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac. They buy mortgages from lenders and sell them to investors to make mortgages more available.
Non-conforming loans are loans that do not conform to the GSE guidelines.
Jumbo loans are loans that are larger than the loan limits set by the GSEs.
Portfolio loans are loans that are held by mortgage lenders on their own books. These types of loans may have features that other loans do not because lenders can set their own guidelines.
Conventional Fixed Rate loan have interest rates that don’t change for the life of the loan.
Benefits of a Fixed Rate loan include:
- The interest rate does not change for the life of the loan which provides protection from rising interest rates.
- Usually there is less documentation required than for FHA or VA loans decreasing the overall processing time.
- Typically the interest rate and APR are lower than other types of fixed-rate loans.
- These loans are available for refinancing.
- Different fixed rate period options are available, such as 15, 20 or 30 years.
Adjustable Rate Loans
With an adjustable rate loan, the interest rate changes periodically, usually in relation to an index and payments may go up or down accordingly.
Benefits of an Adjustable Rate loan include:
- Lenders generally charge lower initial interest rates, initially, making payments lower.
- The loan could be less expensive over a long period than a fixed-rate mortgage if interest rates remain steady or move lower.
Considerations of an Adjustable Rate loan include:
- There is the risk that an increase in interest rates would create higher monthly payments.
- The length of time the loan is held should be considered. If the loan will not be held for a long time, rising interest rates may not pose a major problem.
Jumbo Loan Programs
A jumbo loan is a nonconforming loan if it exceeds the conforming loan limits imposed by Fannie Mae and Freddie Mac. Currently, across the U.S., high-balance limits range from $424,100 to $625,000. These types of loans are available for primary residences, second or vacation homes and investment properties. They are also available as fixed-rate or adjustable-rate loans and typically have higher interest rates, stricter underwriting requirements and larger down payments.
Several different Down Payment Assistance (DPA) programs exist in each state that cover the down payment for eligible homebuyers to assist with purchasing a home. Some of the programs also include closing cost and pre-paid expenses associated with buying a home. The amount of assistance is based on financial need. Some of the programs are specifically for first-time homebuyers and some can be used to refinance an existing loan. To reduce the rate of mortgage default and to equip homebuyers with the information needed to budget for all of the expenses associated with owning a home, some of the programs require pre-purchase counseling or education. Also, for down payment assistance programs, income limits may apply.