There are many different types of loan programs and, often, several options within each type, so it can quickly become confusing when you are trying to decide which type of loan program is the best fit for you. There are several ways that loan programs can be categorized at a very high level to make it easier to classify and understand the options available. One such way to segment them into government loans and conventional loans.
A “government” loan is any loan that is insured by the Federal Government. Government options include FHA, VA (for veterans), and USDA loans. The loans are not funded by the government agencies, rather the agencies insure the lender for a portion of the loan against losses incurred if the borrower defaults on the loan. This protection makes it safer for the lender to offer loans with lower qualification requirements with interest rates that are comparable, or sometimes even better, than conventional loan rates.
Government loans come with some serious benefits: low down payment requirements, more flexibility in the qualification guidelines, and, often, slightly lower rates. However, there are some drawbacks to government-insured loans. Most government options have an upfront mortgage insurance premium as well as monthly mortgage insurance premiums that must be paid for the life of the loan. The upfront premium can typically be financed into the loan. VA loans have an upfront funding fee that may be financed in the loan, but they do not have a monthly mortgage insurance payment. Veterans with a qualifying disability may be eligible for a waiver of the funding fee.
Another potential drawback to government-insured loans are income limits, occupancy requirements, and location restrictions. All three of the common government-insured options discussed in this article require that they be used only to finance the purchase of owner-occupied homes, so no rental or vacation properties. USDA loans also have maximum income restrictions and they may only be used to finance homes in specifically designated rural areas, though you may be surprised by some areas that are considered eligible. You can click here to use the USDA’s interactive map to check for eligible areas near you.
Conventional programs can be summed up rather easily: anything that isn’t a government-insured program. Conventional programs can be further segmented into two categories: conforming loans and non-conforming loans.
Conforming loans are those loan programs that conform to the guidelines established by Fannie Mae and Freddie Mac, including credit requirements, maximum loan amounts, and other criteria. These two entities, along with Ginnie Mae, which provides similar services for government loans, purchase most of the residential mortgages originated by every lender in the country so their requirements set the baseline for most mortgage lending rules. They work with lenders behind the scenes so you will not make payments to them or have to deal with them.
As you may have guessed, non-conforming loans are simply those loan programs that do not conform to Fannie Mae’s or Freddie Mac’s guidelines. The most common example of non-conforming loan programs are home equity loans, or second mortgage products used to tap the equity available in your home. Common examples of non-conforming programs used to purchase a home are Jumbo loans, mortgages that exceed Fannie and Freddie’s maximum loan amounts. There are many different kinds of non-conforming programs that offer value and benefits in specific situations.
Of course, the best way to narrow the search for the best loan program for your specific needs is to contact a mortgage expert like me. I can help you gather the information you need to make an informed decision. Do not hesitate to contact me at your convenience. As always, I stand ready to help you achieve your goals.