Types of Loan

Conventional / Conforming Loans

A conventional mortgage is a mortgage not obtained through the Ferderal Housing Administration (FHA), the Department of Verterans Affairs (VA), or the US Department of Agriculture (USDA). There are two times of conventional mortgages:

  • Conforming
  • Non-Conforming

Conforming Mortgages

A conventional mortgage conforms to loan limits, down payment requirements, borrower income requirements, debt-to-income ratios, and other underwriting guidelines established by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac purchases mortgages that meet these limits and create additional funds that lenders can use to create new mortgages.

The Federal Housing Finance Agency, currently have set the loan limit which allows higher loan limits for areas of the country designated as "high-cost areas". There are high cost areas in all regions of the country except the Midwest.

Government (FHA, VA, USDA)

Non-conventional mortgages are mortgages obtained through government agencies such as the Federal Housing Administration (FHA), the Department of Verterans Affairs (VA), and the United States Department of Agriculture (USDA).

Fereral Housing Administration (FHA) Loans

The Federal Housing Administration (FHA) does not make loans, but rather insures loans. In the event of a foreclosure, the lender is protected by mortgage insurance issued by the government through the PHA. The insurance covers the full value of the loan.

The primary function of the FHA mortgage insurance program is to ensure that low-income families, first-time buyers, and other borrowers who could not qualify for conventional loans to obtain a mortgage. FHA lending limits establishes the maximum amount that a borrower could borrow for a FHA home loan, and these limits help to reserve FHA insured loans for the home buyers who did not have access to other mortgage products.

FHA loans are now available to more Americans as a result  fo higher loan limits. These limits are posted in HUD's website for each county in eash states, Guam, and the U.S. Virgin Islands. Advantages of the FHA loans include "low down payments, no prepayment penalties, and fee limits on closing costs".

FHA Programs

FHA offers a number of programs to meet the needs of eligible borrowers. Several popular programs include:

  • 203 (b) Home Mortgages: FHA primary program that have a fixed rate program used to purchase or refinance one-to-four unit family dwellings
  • 251 Adjustable-Rate Mortgages: This program is based on the 203 (b) with the added feature of an adjustable-rate. FHA offers a number of different types of ARM's that include one-, three-, five-, seven-, and ten- year versions.
  • 234 (c) Condominium Mortgages: This program is used to purchase a unit in a condominium. FHA has a number of specific requirements regarding the condominium project. An example would be that the condo must be a part of a project with at least four units and 51% of the units must be owner occupied.
  • Energy Efficent Mortgages: These types of loans allow for improvements to exsist and new construction properties to increase their energy efficiency. Financing is the greater of 5% of the loan or $4,000, with the maximum capped at $8,000.
  • 245 (a) Growing Equity Mortgages & 245 Graduated Payment Mortgages: These two loans are similiar in structure. These programs are intended to assist borrowers by lowering the intial cost of their mortgage. Payments are increased each year, so the programs are best for borrowers expecting a steady increase in their income over time.
  • 2-1 Buy downs: FHA permits borrowers to buy down the rate on their fixed rate loan. Lenders are required to qualify the borroer at the note rate and not the buy down rate.
  • 203 (g) Officer and Teacher Next Door: The 203 (g) program is intended to revitalize communities by offering homes for sale at a 50% discount to teachers, law enforcement officers, fire fighters, and EMT personels. HUD requires a mortgage agreement to be signed for the discounted amount although no payments or interest is charged as long as the borrower fullfills a 3 year owner occupancy requirement.

Non-Conforming Mortgages

  • A non-conforming loan is a conventional mortgage loan that exceeds current maximum loan limits and underwriting requirements established by Fannie Mae and Freddie Mac. Examples of non-conforming loans include:

    • Jumbo Loans: a mortgage exceeding loan limits established by Fannie Mae and Freddie Mac with conforming loan limits set at a high rate, many loans that were once non-conforming jumbo loans are now conforming loans.

    • Alt-A: designation for loans made to borrowers who do not represent the greatest credit rish of subprime but who still do not quite meet the underwriting requirements for conforming prime rate loans.

    • Subprime Loans: are higher interest loans made to borrowers with blemished credit or other qualification issues, that do not conform with Fannie Mae and Freddie Mac underwriting requirements.

    • Niche Loans: are loans for borrowers with unique circumstances or needs

    • Super Conforming Loans: The Housing and Economic Recovery Act of 2008 authorized Freddie Mac to publish higher conforming loan limits. Super conforming loans are used in certain high cost areas and may be made at the lesser of 115% of the area median home price or 150% of the conforming loan limit. Freddie Mac and FHFA's website will provide more in details on the super conforming loans.