1. Conventional Loans
Conventional mortgages or loans typically have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. Conventional mortgages or loans are not guaranteed by the federal government, and as a result, typically have stricter lending requirements by banks and creditors.
- A conventional mortgage or conventional loan is a home buyer’s loan that is not offered or secured by a government entity.
- It is available through or guaranteed by a private lender, such as banks, credit unions, or mortgage companies or the two government-sponsored enterprises—Fannie Mae and Freddie Mac.
- Potential borrowers need to complete an official mortgage application, supply required documents, credit history, and current credit score.
- Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans.
Conventional vs. Conforming
Conventional loans are often erroneously referred to as conforming mortgages or loans. While there is overlap, the two are distinct categories. A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit, set annually by the Federal Housing Finance Agency (FHFA): In 2020, in most of the continental U.S., a loan must not exceed $510,400.
So while all conforming loans are conventional, not all conventional loans qualify as conforming. A jumbo mortgage of $800,000, for example, is a conventional mortgage but not a conforming mortgage—because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.
?The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through mortgage-backed securities, which trade in a well-established forward market known as the mortgage to be announced (TBA) market. Many of these conventional pass-through securities are further securitized into collateralized mortgage obligations (CMOs).
2. FHA Loans
An FHA loan is insured by the Federal Housing Administration, a federal agency within the U.S. Department of Housing and Urban Development (HUD). The FHA does not loan money to borrowers, rather, it provides lenders protection through mortgage insurance (MIP) in case the borrower defaults on his or her loan obligations. Available to all buyers, FHA loan programs are designed to help creditworthy low-income and moderate-income families who do not meet requirements for conventional loans.
FHA loan programs are particularly beneficial to those buyers with less available cash. The rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans.
Some of the other benefits of FHA financing:
- Only a lower down payment is required than a conventional loan.
- Some closing costs can be financed.
- Lower monthly mortgage insurance premiums and, under certain conditions, automatic cancellation of the premium.
- More flexible underwriting criteria than conventional loans
- FHA limits the amount lenders can charge for some closing cost fees (e.g. the origination fee can be no more than 1% of mortgage).
- Loans are assumable to qualified buyers.
3. VA Loans
VA guaranteed loans are made by lenders and guaranteed by the U.S. Department of Veteran Affairs (VA) to eligible veterans for the purchase of a home. The guaranty means the lender is protected against loss if you fail to repay the loan. In most cases, no down payment is required on a VA guaranteed loan and the borrower usually receives a lower interest rate than is ordinarily available with other loans.
Other benefits of a VA loan include:
- Negotiable interest rates.
- Closing costs are comparable and sometimes lower - than other financing types.
- No private mortgage insurance requirement.
- Right to prepay loan without penalties
- The Mortgage can be taken over (or assumed) by the buyer when a home is sold.
- Counselling and assistance available to veteran borrowers having financial difficulty or facing default on their loan.
Although mortgage insurance is not required, the VA charges a funding fee to issue a guarantee to a lender against borrower default on a mortgage. The fee may be paid in cash by the buyer or seller, or it may be financed in the loan amount.
A VA loan can be used to buy a home, build a home and even improve a home with energy-saving features such as solar or heating/cooling systems, water heaters, insulation, weather-stripping/caulking, storm windows/doors or other energy efficient improvements approved by the lender and VA.
Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program. A Certificate of Eligibility from the VA must be presented to the lender to qualify for the loan.
4. USDA or Rural Housing Loans
USDA loans are made on properties within a qualifying rural area. Applicants with very low to moderate incomes can qualify for these loans, but still able to afford the housing payments, including the principal, interest, and insurance that are part of the monthly payment amount.
Other benefits of a USDA loan include:
- Affordable to those with lower incomes and good credit histories.
- No required down payment.
- New Manufactured homes are acceptable as long as conditions are met.
- Available in 30-year or 15-year fixed rates.
- Closing costs and lender fees can be rolled into the loan.
- Renovation and Repair costs can be rolled into the loan amount.
The property doesn't have to be a farm or open land to qualify for this type of loan. It just has to be in a qualifying area.