Mortgages and Loans
What is the difference between a loan and a mortgage?
A mortgage is a type of loan that has some kind of property associated with it as a guarantee that the loan will be repaid. For example, if you purchase a house with a loan from a bank, the house is tied to the loan as collateral and the bank can take it from you if you do not repay. In the context of these articles, the terms "loan" and "mortgage" are used interchangeably.
Basic Categories Of Home Purchase Loans
While there are hundreds of types of home loans, almost all of them fit into one of the categories listed below. This is a simplified overview for the purpose of understanding how purchase mortgages are categorized. Your Realtor and experienced loan officer will provide answers to more complex questions and assist you in selecting the loan program that best meets your goals.
Government Insured Home Loans:
VA is a zero down mortgage program that is at market rate for government insured loans and does not require mortgage insurance. To be eligible for this type of mortgage you must have veteran status with one branch of the U.S. military and have a DD-214. VA underwriting guidelines do not change from one lender to another, though just as with FHA, not every lender is able to provide VA loans.
FHA loans are often referred to as first time homebuyer programs, but they can be used to purchase your first home or your tenth. FHA requires a minimum down payment (and does allow the down payment to come from gift funds), has more lenient credit requirements and will allow non-occupying co-borrowers. To be eligible for this type of mortgage, you must have a valid social security number and the purchase must fall within FHA loan limits.
FHA underwriting guidelines are the same from lender to lender, although a complete understanding of what FHA allows is not a forgone conclusion when speaking with someone who originates FHA mortgages. Not every lender is approved to originate FHA loans, it pays to work with a loan consultant who understands what they are doing, and has experience and access to a wide range of loan programs.
Conventional Home Loans: With the proper credit and financial profile, most anyone is eligible for a conventional mortgage. While many homebuyers believe they need a ten to twenty percent down payment, there are conventional mortgage programs that allow for as little as 3% down. Depending on how your home loan is configured, you must have 5% of your own money in the purchase transaction. However, there are ways to do as little as 3% of your own funds based on qualifications. Conventional mortgages are all underwritten using the same set of guidelines based on rules issued by Fannie Mae and Freddie Mac. Each program has a slightly different set of advantages and disadvantages. Working with a lender who has access to, and knowledge of both programs can be of great advantage to you.
Jumbo Home Loans: The distinguishing feature between a jumbo loan and any conventional loan is that the loan amount exceeds the conventional limit. These loans tend to have a higher interest rate than a conventional loan and all of the same programs are not available with jumbo mortgages.
Non-Conforming Home Loans: This category refers to niche mortgage programs for buyers who do not meet conforming loan qualifications. These loans can be very credit score driven and may tend to have higher interest rates.
Examples of non-conforming home loans:
- Stated Income A stated income loan does not require the borrower to document the income that is shown on the application. These programs are often utilized by self-employed borrowers, and individuals who have a difficult time documenting actual income.
- NINA A No Income, No Asset home loan doesn't require the borrower to document the income or assets listed on the loan application. This program might be used when the source of funds and income needed to purchase your home cannot be documented properly.
- No-Doc A No Document home loan does not require the borrower to disclose a job, income, or assets. This program might be used for a borrower who has been self employed for less than the required amount of time. These types of loan programs require strong credit.
- 100% Financing Borrowers with good credit may take advantage of 100% Financing loan. This may be accomplished in one of two ways; a first and second mortgage that avoids the mortgage insurance requirements or a stand-alone, all-in-one loan.
Discuss these options with your Realtor and loan officer to determine which type of home loan you qualify for and which best meets your financial goals.
What is the first step when looking for a home loan?
Most experts recommend that you should get prequalified for a loan first. By being prequalified, you will know exactly how much house you can afford.
Almost all mortgage lenders now prequalify and preapprove customers, and many of them can even do it on the Internet. You also can do your own affordability calculations; most recent consumer books on home buying include steps to doing so, as do various real estate Internet sites.
Where do I get information on finding the best loan?
For information on how to find the best home loan for you, check out this booklet:
"How to Shop for a Mortgage," by the Mortgage Bankers Association of America
1125 15th St., N.W.
Washington, DC 20005
call (202) 861-6500.