Types of Mortgage Loans: The Basics
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Conventional Loans
Conventional mortgage loans are privately insured by Fannie Mae and Freddie Mac. This is the most popular type of mortgage chosen by most home buyers. Conventional loans usually process quickly and may present with lower monthly payments to the buyer than some other types of loans.
Conventional loans offer buyers the ability to get higher loan amounts than some other types of mortgages. They can also be utilized to purchase homes aside from the primary residence (like a vacation home or an investment property)—something that other loan types cannot do.
Both fixed and adjustable interest rates are available with conventional loans, and this type of mortgage requires a minimum down payment of 5%. However, if you put down a down payment of 20%, you will not have to pay a private mortgage insurance premium—or PMI—which will add extra money to each monthly payment. If you pay less than 20% down, PMI premiums will apply until your loan-to-value reaches 80%. After that, they will no longer need to be paid and your monthly mortgage payment will decrease.
Conventional loans typically have more stringent credit terms than other mortgage loan types. Because of this factor, some people do choose other types of loans.
FHA Loans
FHA—or Federal Housing Administration—Loans are mortgages that are federally insured. This loan option requires a low down payment of just 3.5% and has more flexible credit standards than conventional loans do. In fact, FHA loans can be approved on credit scores as low as 580. In some cases, FHA loans can be considered even if there are bankruptcies or foreclosures on the credit report, as long as enough time has elapsed since their discharge.
In general, FHA loans present lower upfront costs than conventional loans do. For some applicants, a streamlined application process is an option so that loans can be processed quickly.
A mortgage insurance premium—or MIP—is a monthly premium that is charged on all FHA loans. As of January 26, 2015, the FHA has reduced the amount of the MIP from 1.35% of the amount financed to .85% of the amount financed.
VA Loans
VA loans—or Veteran’s Administration loans—are mortgages available only to veterans, active military members and in some cases, their surviving spouses. VA loans are a great deal if you are eligible, as they usually boast significant savings over other loan products.
Unlike conventional or FHA loans, there are no insurance premiums associated with VA loans. This alone makes the VA loan one of the most beneficial types of mortgages for eligible veterans or military personnel. However, VA loans also feature capped closing costs, negotiable interest rates, and no appraisal in some instances, furthering the amount of potential savings.
There is no down payment required on a VA loan so long as the home’s price does not exceed the home’s value. There are no prepayment penalties associated with VA loans (there may be with other loan types), and there is hardship assistance available from the VA in case the borrower or their family experiences certain economic hardships.
HARP
The Home Affordable Refinance Program, or HARP, is one of the most recent types of mortgages. It was designed to help those who bought homes before the housing bubble burst and who currently owe more money on their homes than they are worth.
In order to be eligible for a HARP refinance, you need to be a current homeowner who has a loan that was originally owned by Fannie Mae or Freddie Mac or sold to them before May 31, 2009. You must not have had any late payments in the past year and you may not currently be in the foreclosure process. If you have utilized the HARP program before, you cannot use it again.
The HARP program allows these underwater homeowners to refinance at current and more affordable rates so that they can be in a better financial situation. The HARP program expires on December 31, 2015.
Adjustable Rate Mortgages (ARMs)
ARMs took a bad rap after the housing bubble burst, but they are a very useful product when used correctly. ARMs feature a very low introductory interest rate for the first five or ten years, then the rate will adjust annually to reflect whatever the current interest rate is at the time. For some, this means they risk increased rates and larger monthly mortgage payments.
ARMs—which can be FHA, VA, or conventional loans—are excellent types of mortgage loans for people who don’t plan to live in their home beyond the introductory interest period. They can also be used by people who want to refinance before their introductory rate expires.
Since mortgage rates fluctuate, there is no way to guarantee a lower mortgage payment if you refinance in the future. However, the benefit is that your monthly mortgage payments and the amount of interest you pay during the introductory period will be less than what you’d pay otherwise. For many people, this is an acceptable risk and can save them a lot of money.
USDA Loans
USDA loans are types of mortgages that are available in eligible rural areas. These loans offer no down payment options, flexible credit guidelines and fixed 30-year interest rates that the buyer and lender must agree on. In addition, there is no maximum purchase price associated with USDA loans—something that makes them unique. USDA mortgages have a guarantee fee, which is similar to mortgage insurance. However, the full amount of the guarantee fee can be rolled into the loan.
There are income limits associated with USDA mortgage loans. The household income for the borrower(s) cannot exceed certain limits based on the location of the home. This amount varies from location to location. USDA loans can finance existing homes, new home construction, planned unit developments, some condominiums and certain manufactured homes.
For more information on types of mortgages, please contact an NLC Loans™ personal mortgage advisor or check us out online.
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