Mortgage Consultants Group

What types of loans are available?

Whether you are looking for a first mortgage, adding a second mortgage or trying to refinance an existing mortgage, it is helpful to understand more about how the general loan classifications.

Mortgage loans are categorized as either fixed rate mortgages (FRM), adjustable rate mortgages (ARM) or some combination (hybrid) of the two. This classification is based on the type of interest rate structure governing the loan. The most common mortgage terms are 30 or 15 year loans (also, 25, 20 and 10). Generally, a short term loan will have less interest and higher payments - a long term loan, more interest and lower payments. A 15 year mortgage may have less than half the interest costs of a 30 year mortgage.

Characteristics of a fixed rate mortgage:

  • The interest rate is fixed for the life of the loan (whether interest rates go up or down)
  • Payments generally stay the same each month.

Characteristics of an adjustable rate mortgage:

  • The interest rate is adjusted periodically by adding a margin to an index specified by the mortgage (a 1-year ARM adjusts annually)
  • Payments generally fluctuate along with the interest adjustment
  • ARM's have limits on the amount of interest adjustment that can be made in given periods and across the life of the loan.

Characteristics of a hybrid loan:

  • The interest rate follows some set plan for adjustment, using a combination of fixed and adjusting interest rates.
  • Options are designed to meet a wider variety of needs.
  • Qualifying standards are often more liberal than traditional loans.

Mortgage loans are also categorized as government loans or conventional loans. Government loans are FHA, VA and RHS loans; all other loans are conventional.

Government Loans:

FHA Loans

In 1934 the government set up the Federal Housing Authority (FHA) to help stimulate an economy in crisis. FHA programs were designed to help people buy their houses rather than rent. FHA programs allow more flexibility than is available for borrowers seeking conventional loans (Fannie Mae criteria). However, the FHA does not actually make the loans; they insure them.

Working with approved lenders, the FHA serves to lower the risk for the lender, thus making loans more readily available. If the borrower defaults, FHA pays the lender. Even though the insurance cost is passed down to the home owner, after paying down the loan, the borrower may drop the insurance. The equity that has been built up serves as the security the lender needs to feel comfortable with the loan. With an FHA loan, if the borrower experiences unforeseen hardships, FHA has options to help keep the home out of foreclosure. The lender must follow FHA's servicing guidelines; therefore, an FHA insured loan offers the borrower protection as well as the lender.

FHA programs do have some loan requirements, but they are not as strict as conventional loans. They generally require less down, less stringent credit, and the ability to finance a higher percentage of the value of the house. For instance, FHA only requires a minimum 3% down payment—which is low by industry standards. Also, while they do look at credit history, they are more flexible than conventional loans, looking more at the borrower's ability to repay than at any problems in the past.

Although the requirements are less strict than conventional loans, by law, the FHA can only insure loans up to a maximum amount depending on where the home is. The FHA Maximum Mortgage Limits site will let you look up the limits for the areas of choice. Likewise, the loan size is restricted to a maximum amount of the value of the home. However, it is a very high amount (often up to 97% of the value). So the regulations governing FHA loans are very liberal.

In the long run, FHA loans are much like any other except that they are generally easier to qualify for, and the borrower has more insurance against foreclosure. FHA programs also offer more than just home purchasing plans. They offer refinancing in order to lower interest rates or payment amounts; they offer remodeling money; they even offer cash out or debt consolidation loans.  Whatever your needs are, FHA may be a valid option to pursue. 

RHS Loans

Rural Housing Services (RHS) loans are administered by the USDA's Rural Development staff. The Housing and Community Facilities Programs (HCFP) is part of the USDA's Rural Development. Their mission is to improve the quality of life in rural areas. Part of fulfilling that mission is providing loans and grants for housing and community facilities. Loans can be obtained for building, repairing, renovating, relocating, purchasing, and even preparing sites for construction.

They have a variety of programs. Among these are the Section 502 housing programs which are either guaranteed or direct. The Section 502 loans are designed to help rural residents that are without adequate housing and cannot obtain credit elsewhere. They must have an acceptable credit history and must be able to make the mortgage payment (estimated at 22-26% of income).

The guaranteed loans are made by the private sector but guaranteed by RHS. They help rural residents with low-to-moderate income (up to 115% of Area Median Family Income) obtain housing. Section 502 direct loans are made directly by the government. They target low and very low income families (50-80% AMI and under 50%). The terms of the loans are generally long—30-33 years, sometimes, based on need, stretched up to 38 years.

While the Rural Housing Services are committed to helping rural residents obtain affordable housing, they do have requirements that the homes be modest in size, design and costs. As with any loan, the borrower must determine which loan program will best match their needs. RHS loans are an excellent way to obtain housing that fits within your means when other loans programs will not work.

VA loans

Like the FHA loans, VA loans are only guaranteed by the U.S. Department of Veteran Affairs; lenders make the loans to eligible veterans for the purchase, construction, or energy-saving improvement (approved by the lender and VA) of a home. VA loans also have easier eligibility requirements than conventional loans, often lower closing costs, and more liberal terms (usually no down payment is required) including negotiable interest rates. If you are eligible, the VA will issue a certificate of eligibility that you take to the lender when making application for your loan. Lenders generally place a maximum limit on VA loans.

Conventional Loans - Conventional loans are classified as conforming or non-conforming.

Conforming loans

Loans that adhere to the guidelines set forth by Fannie Mae (from FNMA: Federal National Mortgage Association) and Freddie Mac (from FHLMC: Federal Home Lone Mortgage Corp ) , two corporations that purchase, package and sell loans that meet their conditions as securities to investors. These are referred to as “A” paper loans. Conforming loans must meet certain guidelines regarding down payment, loan limits, borrower qualifying criteria and appropriate properties.

Non-Conforming / Portfolio Loans

Loans that fall into “B, C or D” paper profiles are the non-conforming loans. They are often offered to high credit-risk borrowers with a detrimental credit history by portfolio lenders. Portfolio lenders don't intend to sell their loans so they can be more liberal about their borrowers' eligibility requirements. However, these loans generally have a higher interest rate than conforming loans.

With the variety of loan possibilities, it is important to consider your needs in conjunction with the options available before making your loan choices. Your decision is often influenced by the amount of payment you can afford and how long you plan on staying in your house. Unless your intention is to stay long term, you may want to consider an option other than a fixed rate mortgage, such as an ARM or Hybrid loan. Some of these options allow for lower interest rates in the earlier stages, with options to convert or phase into a fixed rate over time.

Non-Conforming / Jumbo Loans

The Federal National Mortgage Association (FNMA [dubbed Fannie Mae]) and the Federal Home Loan Mortgage Corporation (FHLMC [dubbed Freddie Mac) are two government sponsored enterprises authorized to make loans and guarantee loans. These two entities control about 90% of the secondary mortgage market. The loans are not government guaranteed. These corporations just establish standards and guidelines for the market. Loans that fit within those guidelines are called "conforming" loans.

So what does all this have to do with jumbo loans?

Well, every year these entities publish the current loan limits. The loans that are too large to fit within the industry established guidelines are called non-conforming or jumbo loans. These non-conventional loans are harder to find funding for since they are not backed by Fannie Mae and Freddie Mac. They are a higher risk, and therefore, harder to obtain. The interest rate is generally higher, and often, the down payment requirements are higher. However, there are lenders that will fund them.

The up side is that there is more flexibility for the purchaser by way of their ability to purchase the home they actually want with involvement in negotiating the terms. Sometimes this can be worth the extra cost and effort. As with any loan, review your options before making any final decisions.

Other Types of Loans:

Reverse Mortgages

A reverse mortgage is designed to help elderly home owners benefit from their equity without having to sell their house or make payments. The loan is funded through a lump sum payment, monthly payments or a line-of-credit. The money received from the loan is not taxable nor is it considered in determining Social Security or Medicare benefits. The loan does not have to be paid until the homeowner sells the property, moves or passes away. The elderly home owner is secure in the home even if the loan term ends or the loan grows beyond the value of the property.

Home equity line of credit

A home equity line of credit (HELOC) is similar to a home equity loan, except that the funding can happen over a period of time. An appraisal will be required to determine the amount of the equity-based line of credit. This credit line is an approved sum against which the borrower may draw (or pay down and even draw back up) as desired, up to that pre-determined amount, for a specific duration of time (5, 10, even 20 years). Most often the interest rate will fluctuate month by month during the funding period.

Generally you will make monthly interest-only payments until the loan is completely funded. Once that pre-set funding period is over, the credit line will convert to a second mortgage loan, and payments for both the principle and interest will begin. Many of the loan costs and fees applicable to the first mortgage are required for the HELOC as well.

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