Mortgage Types
Conventional Loan
A conventional loan is not guaranteed or insured by a government agency. A conventional loan is also known as a conforming loan because the loan conforms to Fannie Mae and Freddie Mac standards. If you are looking at a conventional loan, keep the following points in mind:
A conventional loan is especially good for first-time borrowers with decent credit. The minimum accepted credit score for most conventional loans is 620.
The amount of the borrower's down payment can affect the interest rate and final loan costs. A 20% down payment is not a requirement for a conventional loan; in fact, many conventional loans are made with as little as 3 percent down.
Private mortgage insurance, or PMI, is required for any conventional loan with less than a 20% down payment.
The Federal Housing Administration (FHA)
What is the Federal Housing Administration?
The Federal Housing Administration, generally known as "FHA," provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single-family and multifamily homes, including manufactured homes and hospitals. It is the largest insurer of mortgages globally, insuring over 47.5 million properties since its inception in 1934.
What is FHA Mortgage Insurance?
FHA mortgage insurance provides lenders with protection against losses due to homeowners defaulting on their mortgage loans. The lenders bear less risk on an FHA-insured mortgage because FHA will pay a claim to the lender in the event of a homeowner's default. Loans must meet specific requirements established by FHA to qualify for insurance.
Why does FHA Mortgage Insurance exist?
All Loan Terms (Greater than 15 years and less than or equal to 15 years):
- LTV greater than 90% - Annual MIP will be collected until the end of the loan term, or 30 years, whichever occurs first.
- LTV less than or equal to 90% - Annual MIP will be collected until the end of the loan term, or 11 years, whichever occurs first.
You also have to pay the 1.75% (upfront funding fee) for any loan amount at all LTVs. The upfront funding fee can be financed into the amount of your loan.
United States Department of Agriculture (Rural Housing)
What does this program do? This program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe, and sanitary dwellings as their primary residence in eligible rural areas. Eligible applicants may build, rehabilitate, improve or relocate a dwelling in an eligible rural area. The program provides a 90% loan note guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural homebuyers.
Who may apply for this program? Applicants must:
- Meet income-eligibility
- Agree to personally occupy the dwelling as their primary residence
- Be a U.S. Citizen, U.S. non-citizen national or Qualified Alien
- Have the legal capacity to incur the loan obligation
- Have not been suspended or debarred from participation in federal programs
- Demonstrate the willingness to meet credit obligations on time
- Purchase a property that meets all program criteria
Veteran Affairs (VA) Loan
VA-backed home loans help Veterans like you build, buy, improve, or refinance a home. Of course, you will still need to have the required credit and income for the loan amount you want to borrow. However, a VA loan may offer better terms than a traditional loan from a private bank, mortgage company, or credit union. For example, nearly 90% of VA-backed loans are made with no down payment.
How does a VA-backed home loan work?
With a VA-backed home loan, the VA guarantees (or insures) a portion of the loan you get from a private lender. If your VA-backed home loan goes into foreclosure, the guaranty allows the lender to recover some or all of their losses. Since there is less risk for the lender, they are more likely to give you the loan under better terms. As a result, nearly 90% of all VA-backed home loans are made without a down payment.
Lenders follow the VA guidelines when making VA-backed home loans. These guidelines may include having a high enough credit score or getting an updated home appraisal (an expert's estimate of the value of your home). Lenders may also require you to meet additional guidelines before giving you a loan.
Non-Qualified Mortgage or Non-QM
What Are Non-QM Loans?
Non-QM loans are mortgages that do not meet the requirements for Qualifying Mortgages (QM).
The government does not back Non-QM loans like FHA, VA, and USDA loans, and they do not conform to the standards of Fannie Mae or Freddie Mac. A non-QM loan is designed to help homebuyers who do not fit the strict criteria of qualifying mortgage get into a home. Examples of who may benefit from non-QM financing, someone with a lower credit score, self-employed, someone with a higher debt-to-income ratio, or someone who can not provide the documentation required of a qualified mortgage.
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