This video reflects the perspectives of the Gaylord-Hansen Team at loanDepot. We advise discussing directly with your mortgage expert or lending professional for any advice regarding your particular situation.
Let's discuss the basics of the different loan programs available to borrowers and dive deep into each program that might best fit your needs.
We will talk at a high level about the four primary programs:
A conventional loan is the most common loan obtained by home buyers. About 65% of the loans originated in the United States are conventional loans. These loans are offered through mortgage companies and banks by Fannie Mae and Freddie Mac. Fannie and Freddie are private corporations. However, they are considered a quasi-public corporation supported by the government with a public mandate to provide mortgage loans to consumers.
There are numerous programs offered through conventional loans, the most common being a 30-year fixed rate mortgage. They offer down payment programs as low as a 3% down for individuals that meet median income requirements.
One of the myths about conventional loans is you have to have at least a 20% down payment. This is not true. A home buyer can make 3%, 5%, 10%, 20%, or more for a down payment and anywhere in between. For down payments less than 20%, your loan would require Private Mortgage Insurance (PMI). This insurance protects the lender from the additional risk of a smaller down payment. However, it greatly benefits home buyers to enter the housing market. It can be really tough to save such a large down payment. You can start to enjoy the fruits of homeownership much earlier.
A Federal Housing Administration loan, most commonly referred to as an FHA loan, is issued and insured by an FHA-approved lender. About 12% of the loans originated in the US are FHA loans. FHA loans are backed by the federal government and are designed for low- to moderate-income borrowers. Many times, you will hear an FHA program is a first-time home buyer loan. While not necessarily true as it is offered to all types of borrowers, it is used substantially by first-time home buyers.
The primary difference between a conventional loan and an FHA loan are the qualifying guidelines. FHA loans typically allow for a smaller down payment, currently 3.5%. However, the biggest difference is the more lenient credit score guidelines. These guidelines are in place to help promote homeownership and allow more families to achieve the American Dream of homeownership.
All FHA loans, despite the amount of the down payment, have mortgage insurance. The most common down payment on an FHA loan is 3.5%. We discuss FHA mortgage insurance in the video specific to the FHA loan.
A VA loan is offered to active-duty military and retired veterans who served in the five branches of the military. About 10% of the loans originated in the US are VA loans. The Department of Veterans Affairs (VA) offers a $0 down payment option. The loans are issued by approved private lenders and are partially backed, or guaranteed, by the VA.
The VA loan is an outstanding option for active-duty and veterans alike to consider if they are eligible. The qualifying standards are less stringent, and the interest rates are typically lower than conventional and FHA.
The best part about a VA loan is there is no mortgage insurance for a borrower putting down less than 20%. However, a funding fee is added to the loan to help fund the VA program. While this is not an ongoing monthly fee, it is a cost to consider. The funding fee is waived for those individuals who have suffered a disability due to their military service.
A conventional loan may be the better option for a veteran if they have a 20% down payment or greater.
Just as it sounds, a jumbo loan is a big loan. Less than 10% of the loans originated in the US are jumbo loans. Conventional and FHA loans have caps for maximum loan amounts. These caps vary by county throughout the US. In higher-cost areas, such as California and New York, the maximum loan caps are higher. When a borrower requires a loan above the conventional and FHA caps, it is considered a jumbo mortgage.
Jumbo mortgages are not backed by any government agency. These loans are traded and sold on Wall Street. Because the loans are privately held, they carry additional risk to the lender. Thus, the guidelines are typically more stringent, including higher down payment requirements, lower debt-to-income ratios, higher credit scores, and additional reserve requirements after closing.
We hope this video gives you a general overview of the different types of mortgages available. For more detailed information about each program, please visit GH University for a deeper look into the program that fits your situation.
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