TYPES OF MORTGAGE LOANS – SOME BASICS TO ACQUAINT YOURSELF WITH BEFORE YOU TALK TO A LENDER
It all begins with an idea.
If you’re like most people, Mortgage Lending is not something you are an expert in. Don’t feel bad, it’s a complicated field with many players, products and a complex set of interdependent rules. Unless you are unusually dedicated and discerning learner it will be difficult to teach yourself online for several reasons. Not the least of which is that much information is often outdated and other information is just plain wrong.
But you can acquaint yourself with some basics which will go a long way towards preparing yourself for talking intelligently with a Lender.
I cannot emphasize strongly enough how important it will be to talk in depth with a Lender and get an accurate idea of where you stand and what steps need to be taken.
Types of Mortgage Loans
First a little background to give you a framework for the categorization of the Mortgage Loan Universe.
I find it helpful to organize this universe by a dividing it into several classifications. (Keep in mind that the following discussion, in order to remain brief, will make do with some generalization but will remain true in concept.)
The First Division involves dividing loans into those that are backed by the Federal Government and those which aren’t. The Backing means that an agency of the Federal Government will ‘insure’ the Mortgage Lender so that they will be repaid in the event of a default. In essence the Government has embraced the concept of “Home Ownership for All” and so encourages Mortgage Lenders to make loans to ‘riskier’ borrowers by ensuring that they will be repaid.
Government-insured loans
The U.S. government isn’t a mortgage lender, but it does play a role in making homeownership accessible to more Americans who would be considered a higher risk. It has established three government agencies to back mortgages to serve three distinct types of borrowers.
FHA loans are backed by the Federal Housing Administration to encourage lenders to expand home ownership to people with little or lower credit scores and smaller amounts of ready cash for downpayment.
USDA Loans are backed by the U.S. Department of Agriculture to serve people in rural areas.
VA Loans are backed by the U.S. Department of Veterans Affairs to serve veterans as a reward for their service and who may not have had time to establish a downpayment or lengthy job history.
What Loans are Not Insured?
Everything else!
Conventional loans (Non-Government Insured Loans)
This as you might imagine is a large and unwieldy group but let’s plow on. What follows are the major loan types within this category.
This Group is subdivided into two Classifications. Loans that Conform to a set of Underwriting Guidelines and those Non-Conforming loans that don’t.
Conforming Loans
The Federal Government during the last century has interpreted as a legitimate part of its responsibilities the task of increasing homeownership. It has as we have seen created an insurance program for some borrowers but has found it necessary to increase its role. It has determined that the Government backed programs were not enough. And so we now have the Agency Programs.
These Agencies are set up to buy loans from Mortgage lenders that conform to a set of underwriting Guidelines that they have established. In effect, if the Lender has created a loan using these guidelines then the agency guarantees that it will purchase the loan. This replenishes the funds the Lender needs in order to make new loans thus providing liquidity (Availability of Funds) to the Housing Industry in the form of Mortgage Loans.
FANNIE MAE
FREDDIE MAC
THESE ARE THE LOANS MOST OFTEN TALKED ABOUT AND QUOTED ON THE WEB, TV AND RADIO. They usually carry the lowest rates (With some exceptions…I told you it is complicated)
Non-conforming loans
These loans do not conform to Agency standards. Instead, they cater to borrowers looking to purchase more-expensive homes or individuals with unusual credit profiles.
Jumbo loans
Jumbo mortgages are home loan products whose dollar amount exceeds the Agency borrowing limits. For 2023 the Agency Loan limits for a single-family home ranges from $726,200 to $$1,089,300 depending on the County.
HELOCs or 2nd Mortgages
These are loans which take a second position behind a First Mortgage.
Construction loans
If you want to build a home, a construction loan can be a good choice. You can decide whether to get a separate construction loan for the project and a separate mortgage to pay it off. A construction-to-permanent loan, which merges construction costs and financing into a single loan product, is also an option.
Interest-only mortgages
With an interest-only mortgage, the borrower makes interest-only payments for a set period – usually between five and seven years- followed by payments for both principal and interest You won’t build equity as quickly with an interest-only mortgage, though, since you’re initially only paying interest for a set period.
Piggyback loans
A piggyback loan, also referred to as an 80/10/10 loan, involves two loans: one for 80 percent of the home price and another for 10 percent. You’ll make a down payment for the remaining 10 percent. These loan products are designed to help the borrower avoid paying for mortgage insurance.
Congratulations if you made it this far! Now you should understand enough to be able to ask questions and make more sense of the answers when you sit down with a lender. I’d love to help so please consider giving me a call!
Neil