Which mortgage program is best for you?
There’s been a drastic reduction in the number of available mortgage programs due to the Mortgage Meltdown that started in 2007.
Many lenders have gone out of business and the federal government has gotten involved by enacting stricter regulations which have done away with many of the most aggressive loan programs that got so many homeowners in trouble.
Whether purchasing or refinancing, determining which mortgage program is right for you, involves considering the following:
- Your credit scores?
- Down payment amount or home equity?
- Is your down payment saved or gifted?
- Will there be a cosigner?
- Are you a first-time homebuyer?
- Are you a veteran of the militia?
- How long you plan to stay in the home?
- What’s your risk tolerance or how safe do you like to play it?
- Does the property need work to be livable?
The easiest path to take is to pick a fixed rate program, but it may not always be the best option for your specific situation. Our certified mortgage experts our qualified to guide you through the maze of available programs so you select the one just right for your situation.
Mortgage Categories
It may be a bit confusing, but there are actually three main types of mortgages, conforming, government and nonconforming. Let’s look at each.
CONFORMING MORTGAGES: FNMA & FHLMC
FNMA: Federal National Mortgage Association
FHLMC: Federal Home Loan Mortgage Corporation
Mortgage Products Offered:
- Fixed Rate Mortgages (FRM): 40, 30, 25, 20, 15 & 10 year terms
- Adjustable Rate Mortgages (ARM): 10, 7, 5, 3 and 1 year terms, also 6 month terms
- Balloons: 7 & 5 year payment schedules
- Interest Only terms are also available
Positives:
- If you put 20% down there’s no mortgage insurance
- With 20% down don’t have to escrow taxes & insurance
- Most flexible program options
- Higher maximum loan amounts than FHA
Negatives:
- Higher credit score requirements than FHA or VA
- Minimum 5% down
- PMI may be higher than FHA MIP
- More difficult for cosigners
- Typically allows higher debt ratios
If a mortgage conforms to FNMA or FHLMC guidelines, it is referred to as a “conforming” mortgage. FNMA & FHLMC have loan limits, currently set at $417,000 for most area, although high cost areas like California & Hawaii have a higher limit of $729,750. Click here for more information and the latest loan limits.
FNMA & FHLMC started out as Government Sponsored Enterprises (GSE) and eventually became stand alone companies. They were created to standardize the mortgage industry and provide a secondary market where banks and lenders could sell mortgages they made to borrowers, to replenish their funds and repeat the lending cycle. Their creation was one of the key factors in the U.S. having the highest homeownership percentage in the world.
The Mortgage Meltdown though, caused them to be taken over by the federal government on September 7th of 2008. They continue to function as they were intended, although their future is in the hands of Congress.
GOVERNMENT MORTGAGES: FHA & VA
FHA: Federal Housing Authority
Mortgage Products Offered:
- Fixed Rate Mortgages (FRM): 30 & 15 year terms
- Adjustable Rate Mortgages (ARM): 5, 3 and 1 year terms
Positives:
- Only requires 3.5% down
- Flexible credit requirements
- Easy to add a cosigner to qualify
- Typically allows higher debt ratios than FNMA/FHLMC
- Loans can be assumed
Negatives:
- MIP is almost always required
- Must escrow for taxes & insurance
- Very difficult to use for condos
FHA is the largest insurer of mortgages in the world. It was started in 1934 to encourage banks to increase their lending for home loans. At that time, only 40% of households owned their home, the rest were renters. Getting a mortgage usually required putting 50% down and most mortgages only had a 3-5 year term ending in a balloon payment being due.
FHA encouraged banks to allow less down and longer terms because the federal government insured the loans. Borrowers paid for the insurance through upfront & monthly Mortgage Insurance Premiums. These premiums go into a pool operated by HUD (department of Housing & Urban Development). If a borrower defaults on their mortgage, HUD buys the loan off the lender and forecloses. This, by the way, is where “HUD Homes” come from. MIP costs change from time to time depending on the amount of foreclosures tapping into the insurance pool. Click here for more information and FHA Mortgage Limits.
Mortgage Products Offered:
- Fixed Rate Mortgages (FRM): 30 & 15 year terms
- Adjustable Rate Mortgages (ARM): 5, 3 and 1 year terms
Positives:
- Allows 0% down
- Flexible credit requirements
- Flexible work history
- Typically allows higher debt ratios than FNMA/FHLMC
- Loans can be assumed
Negatives:
- Must have served active hazard duty to be eligible
- VA funding fee is financed creating a higher loan amount than the purchase price
- Only a wife can be a cosigner
- Must escrow for taxes & insurance
VA loans were created in 1944 by the Serviceman’s Readjustment Act. It insures mortgages made to eligible military veterans and was meant to reward the veterans returning from WWII. The resulting housing boom created suburbs and led to a sharp increase in homeownership. VA also has loan limits, click here for more info.
It’s important to note that FHA loans are insured by the federal government while VA loans have the federal government’s guarantee.
USDA Rural Development Mortgages: RDA
Mortgage Products Offered:
- Fixed Rate Mortgages (FRM): 30 & 15 year terms
Positives:
- Allows 0% down
- Flexible credit requirements
- Flexible work history
- Typically allows higher debt ratios than FNMA/FHLMC
Negatives:
- Home must be in designated rural area
- There are income limitations to qualify for the program
- Must escrow for taxes & insurance
The United States Department of Agriculture traces its history back to 1935 and President Franklin Roosevelt. It was created to relocate families affected by the Great Depression, many living through the Dustbowl saga of our country.
Mortgages are currently offered in qualifying rural areas and typically have loan size and household income limitations.
NONCONFORMING MORTGAGES:
Any mortgage that doesn’t fall into one of the above mortgage categories is considered a nonconforming mortgage.
The most common category of nonconforming mortgages is “jumbo” mortgages, or mortgages that exceed the size constraints of FNMA and FHLMC.
The second most common category was Subprime mortgage for those with credit unacceptable to FNMA, FHLMC, FHA or VA.
Other types of nonconforming mortgages addressed borrower’s limitations for proving income and assets. Most of these no longer exist.
Mortgage Programs
As illustrated above, each of the category of mortgages ma offer several different mortgage programs. Let’s briefly look at those.
Fixed Rate Mortgages (FRM)
These are mortgages with a fixed rate for the entire term of the mortgage. The entire balance is paid off during this term and the mortgage payment never changes. NOTE: changes in property taxes & home insurance may cause the house payment to change, but the actual Principal & Interest portion of the payment never changes.
Adjustable Rate Mortgages (ARM)
Due to the double-digit interest rates of the 1980′s, lenders came out with ARM’s that had lower starting rates for borrowers. Banks were willing to offer these lower start rates because borrowers assumed part of the bank’s risk for future interest rate changes. Since that time, the number of ARM programs has greatly increased.
The interest rate for an ARM is fixed for an initial period of time. After that initial time the rate can fluctuate according to the program for the remaining time of the loan. Almost all ARM loans are for 30 year periods.
For example, a 3 year ARM will have the initial start rate set for the first three years of the loan. After the 36th month the rate could change every 6 or 12 months depending on the product selected.
How do ARM rates change? Changes are calculated by adding a fixed Margin component, set at the beginning of the loan, to an Index component that may fluctuate.
Common indices are the 1-Year Treasury rate and the 6 month & 12 month LIBOR rates.
Balloon Mortgages
These mortgages have a set rate & payment, based on a 30 year term, but only for the first few years – usually 5 or 7 years. At the end of the 5 or 7 year period the balance of the mortgage is due in full.
The proliferation of ARM programs have led to a sharp decline in the use of balloon mortgages.
Summary
As you can see there are an abundance of choices for a borrower to choose from. Sifting through all these options usually requires the assistance of a certified mortgage expert
Our certified mortgage experts are here to help you sort through these options and help you select the one that’s best suited for your specific situation. You can email or call us, we’re ready to get started when you are.