Many people who are considering buying their first home can be overwhelmed by the myriad of financing options available. Fortunately, by taking the time to research the basics of property financing, homeowners can save a significant amount of time and money.
Loan Types
There are several mortgage loan types; these are differentiated by loan structure and the agencies that secure them.
Conventional Loans
Conventional loans are fixed-rate mortgages that are not insured or guaranteed by the federal government. Although they are the most difficult to qualify for due to their requirements for criteria such as down payment, credit score and income, certain costs, such as private mortgage insurance, can be lower than with other guaranteed mortgages.
Conventional loans are defined as either conforming loans or non-conforming loans. Conforming loans comply with the guidelines set forth by Fannie Mae or Freddie Mac. These stockholder-owned companies create guidelines, such as loan limits - $417,000 for single-family homes, for example - because they package these loans and sell securities on them in the secondary market.
- A loan made above this amount is known as a jumbo loan and usually carries a slightly higher interest rate because of the lower demand for loan pools with these loans in them. Non-conforming loans, usually provided by portfolio lenders, have guidelines that are set by the particular lending institution underwriting the loan.
FHA Loans
- The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development, provides various mortgage loan programs. An FHA loan has lower down payment requirements and is easier to qualify for than a conventional loan. FHA loans are excellent for first-time home buyers because in addition to lower upfront loan costs and looser credit requirements, they allow down payments of as low as 3%. FHA loans cannot exceed the statutory limit.
VA Loans
The U.S. Department of Veterans Affairs (VA) guarantees VA loans. The VA does not make loans itself, but guarantees mortgages made by qualified lenders. These guarantees allow veterans and service people to obtain home loans with favorable terms, usually without a down payment, and in most cases they are easier to qualify for than conventional loans. Lenders generally limit the maximum VA loan ($417,000 in 2008, $625,000 in Hawaii, Alaska, Guam and the U.S. Virgin Islands). Before applying for a loan, request eligibility from the VA. If you are accepted, the VA will issue a certificate of eligibility to be used in applying for a VA loan.
In addition to these common loan types and programs, there are programs sponsored by state and local governments and agencies, often with the goal of increasing investment or home ownership in certain areas.
This article was written by CLAY STAPP.
CLAY STAPP, residential real estate broker and owner of CLAY STAPP+CO. Follow him on Twitter and Facebook
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