Thanksgiving is a time to celebrate and be thankful. It’s a time for family, friends, turkey, stuffing and pie and let’s face it, it doesn’t get much butter than that! But while most are researching recipes to serve on their Thanksgiving menus, some first-time home buyers are researching mortgage loans and which program is the right fit to get them into the right home.
Researching the different types of mortgage loans is an important step in home buying after all, houses aren’t one size fits all and neither are mortgage loans. That’s why we’re here to be your guiding light and help you sift through all the acronyms and abbreviations and decipher what it all means.
There are numerous types of mortgage loans, we’ll take you through some of the most common.
Government backed housing loans
A government backed loan is not a loan directly from the government. Rather, it is a loan that is federally insured by the government. A loan backed by the government allows lenders to offer loans to borrowers who may not otherwise qualify since it offers added protection to them in the event that the borrower defaults or fails to make payments. Examples of government backed mortgage loans are: FHA, VA and USDA loans.
The Federal Housing Administration or FHA which is a part of the Department of Housing and Urban Development (HUD) insures FHA loans so that lenders can offer more relaxed guidelines. These loans often come with eased credit requirements, some as low as a 580-600 minimum FICO score requirement, low down payment options as low as 3.5% of the home's price and lower closing costs.
The downside of FHA loans is that they often carry with them a mortgage insurance premium, to be paid upfront and an added monthly expense of mortgage insurance on top of the monthly mortgage.
VA loans are insured by the U.S Department of Veteran Affairs (VA). As the name suggests, VA loans are reserved exclusively for veterans, military service members or surviving spouses. In order to apply you need a certificate of Eligibility (COE). VA loans often carry a minimum FICO score of 620 and do not require a down payment.
You can learn more about VA loans on the Department of Veteran Affairs website.
In contrast to FHA and VA loans, conventional loans are not insured by the government. They are serviced and originated by banks and other private lenders. Conventional loans carry tighter guidelines and qualifying requirements since they are not backed by the government and present more risk for lenders. In addition to having a healthy credit profile, applicants of conventional loans also usually need a minimum credit score of 680 to qualify.
There are two types of conventional loans; conforming and non-conforming. A conforming loan indicates that the loan follows guidelines set forth by Fannie Mae and Freddie Mac for purchase. Basically, a conforming loan cannot exceed a certain amount. A non-conforming loan is a loan that does not meet the criteria to be purchased by Fannie Mae or Freddie Mac, a common reason is that the loan is too large.
According to the CFPB an adjustable-rate mortgage (ARM) carries an interest rate that will change periodically, usually in conjunction with an index and as a consequence your monthly payments may go up or down accordingly. Lenders generally charge a lower initial interest rate for adjustable-rate mortgage for this type of mortgage. An ARM could be considered riskier since an increase in interest rates would mean an increased monthly payment in the future. So, in a nutshell an ARM means lower initial interest rate in exchange for risking a higher rate in the long run.
In contrast to an adjustable-rate mortgage, a fixed-rate mortgage is a type of loan that carries the same interest rate for the life of the loan. This type of loan has the potential to be more expensive than an adjustable-rate mortgage in the long run if interest rates rise or fall overtime. This type of loan offers consistent monthly payments since the interest rate will not change based on outside factors.
A jumbo loan is a type of mortgage loan that exceeds the limits put in place by the Federal Housing Finance Agency (FHFA). As a result, Fannie Mae and Freddie Mac will not purchase these loans putting more risk on lenders who offer them. Borrowers who apply for a jumbo loan must meet strict qualifying requirements, great credit and a low debt-to-income (DTI) ratio.
The bottom line is that, there are numerous different loan options out there in addition to these that can fit a borrower's needs depending on their unique circumstance. Borrowers need to take time to evaluate their finances and current situation before deciding which loan is the right fit. Did you know that there are also loans out there that will help you with the down payment?
The Chenoa Fund down payment assistance program offered by CBC Mortgage Agency is a loan product that consists of various down payment assistance offerings. Among them is a program where borrowers who meet eligibility criteria can receive a forgivable second mortgage to cover a 3.5% minimum down payment when purchasing a home using a FHA-insured loan. CBC Mortgage Agency’s mission is to help create sustainable homeownership to those who have the income and credit history to afford and maintain a home but may not have had the ability to save for a large down payment. If you would like more information about their program offerings, you can call 866-563-3507 or email them at firstname.lastname@example.org for a list of their approved lenders. *CBC Mortgage Agency does not originate mortgage loans and this is not an offer to lend money or solicit a mortgage application.
*CBC Mortgage Agency sponsors the UHOUSI Initiative.