Financing Options
& Loan Types
Mortgage Types
There are many different types of home loans on the market. On this page I will cover
the most common types. Not every loan type or scenario is covered. After reading this
page you should have an understanding of what loan type might best fit your needs.
To get a more thorough explanation on different loan types please see this link or this link.
Conventional loans
Conventional conforming mortgages are the most common on the market. A conventional conforming loan is a non-government loan. FHA and VA loans are government insured loans. A conventional conforming loan has to fit in a cookie cutter mold to be conforming. Conforming means the loan amount is at $417,000 or less.
It also means that the borrower is typically a wage earner or W-2 employee with good job stability, can easily prove income and fits within the Debt To Income (DTI) Ratio. The borrower must have several established trade lines of credit and must have 2 months of house payment left over in the bank after paying their down payment and closing costs. A self-employed borrow can still fit into this category if they are showing enough income on their last 2 years of tax returns after all of their deductions.
Anything over the conforming loan amount of $417,000 is considered a Jumbo Loan. A Jumbo Loan is still a conventional loan but now it is considered a non-conforming loan because it's higher than the limit of $417,000. Other conventional loans, regardless of loan amount, that are considered non-conforming are when a borrower cannot prove income, doesn't fit within the debt to income (DTI) ratio or doesn't have enough established credit or may even have some derogatory items on their credit report.
There are multiple other types of conventional conforming and non-conforming loans. Some examples would be Adjustable Rate Mortgages (ARMs), option ARMs, baloon payment loans and subprime. As you can see I could easily write a whole book trying to explain the different variations of conventional loans.
FHA loans
FHA loans or Federal Housing Administration are considered HUD loans or Housing and Urban Development. FHA loan limits are different in each county. For example at the time of this writing FHA loans here in Maricopa County are capped in the $263,000 range. Some counties in California are in the 400K plus range. There is currently some pending legislation that may increase these loan amounts as well as reduce the currently required 3% down payment to 0-1.5%
FHA loans are still the market rate and are quite often easier to obtain than a regular conventional conforming loan. The main difference between the two loans is that FHA is government insured to the bank. If a borrower defaults on a FHA loan, HUD steps in and buys the bad loan back from the bank and then sells it as a HUD repo. Because banks are insured by the government on FHA loans their underwriting criteria is less stringent than conventional conforming loans.
FHA does not do any type of stated income loans. Everything is full documentation, meaning pay-stubs, W-2s or 2 years of tax returns on self employed people that still show enough income to qualify after all of their deductions.
Advantages of FHA loans are; only 3% down, higher debt to income (DTI) ratios. FHA loans are also not credit score or FICO score driven. If you do not have the required 620-640 FICO score required on conventional conforming loans you can still get an FHA loan at the market rate. FHA does not like to see any 30 day slow or late pays on your credit in the last 12 months. They may accept 1 or 2 with good letters of explaination.
If you do not have established credit they will use 3 alternate trade lines of credit, these can be 12 months of utility bills, cell phone bill, auto insurance payments and etc. The lender will usually request a credit rating from your alternate trade line source. Foe example, they would ask your utility company for a 12 month payment history that the utility company would then generate and supply to the lender.
FHA also does not require you to have 2 months of house payment left in the bank as reserves after your down payment and closing costs. At the time of this writing FHA allows you to receive gift funds from a family member or a very close friend such as a God Parent. FHA also allows the seller to give you up to a 6% concession of the sales price. By receiving a 6% concession from the seller 3% can used towards your down payment and the other 3% can be used for your loan closing costs.
This in effect allows you to get into a home for $1,000 to $1,500. FHA does not allow the seller to pay your pre-paids. Pre-paids are any prorated daily interest if you do not close on the 30th of the month and any monies required to set up your impound account or escrow account. Your impound account is the account that is set up for taxes and insurance which allows your lender to pay your taxes and insurance directly when they become due.
FHA even allows non-owner occupied co-borrowers. Parents or family can co-sign for a young couple or an individual. The couple or individual should then make the first 6 house payments from their own checking account. After 6 months they can do a refinance without having to requalify and at the same time remove the cosignor completely from the loan. This is a great way to piggy-back the co-signors credit and income for 6 months and then remove them completely in the refinance. The refinance is called an FHA Streamline loan.
For many borrowers, FHA is a better loan. Everything about FHA is easier to qualify for than a conventional loan. With the recent tightening in the mortgage lending market FHA loans are making a strong come-back.
VA loans
VA stands for Veterans Administration. VA loans are government insured loans for veterans. VA will let the Veteran finance 100% of the purchase price. In order to insure the loan the VA charges a 3% VA Funding Fee (VAFF). The VAFF is financed back into the loan. The loan amount ends up being 103% of the purchase price. If the Veteran has at least a 10% VA related disability then they are exempt from the VAFF. The VAFF also decreases as the Veteran puts more down.
If you are considering using your VA loan if you have VA Eligibility please discuss your options in full with your lender. It often makes better since financially for the Veteran to go with an FHA or Conventional loan instead of financing in the 3% VAFF. You must take several things into consideration, the primary thing being how long are you going to be in the home?
In a buyers market it may be better to negotiate that the seller gives the Veteran a 6% concession and then go with an FHA loan. The main drawback would be if the Veteran is financing a home that costs more than the maximum FHA loan amount for that particular county. FHA loans have mortgage insurance and VA loans do not. You should have the lender pencil-out all of your options to see what works best for you.
* Information deemed reliable but not guaranteed. Buyer/borrower to verify all facts with their lender and or accountant.
There are many different types of home loans on the market. On this page I will cover
the most common types. Not every loan type or scenario is covered. After reading this
page you should have an understanding of what loan type might best fit your needs.
To get a more thorough explanation on different loan types please see this link or this link.
Conventional loans
Conventional conforming mortgages are the most common on the market. A conventional conforming loan is a non-government loan. FHA and VA loans are government insured loans. A conventional conforming loan has to fit in a cookie cutter mold to be conforming. Conforming means the loan amount is at $417,000 or less.
It also means that the borrower is typically a wage earner or W-2 employee with good job stability, can easily prove income and fits within the Debt To Income (DTI) Ratio. The borrower must have several established trade lines of credit and must have 2 months of house payment left over in the bank after paying their down payment and closing costs. A self-employed borrow can still fit into this category if they are showing enough income on their last 2 years of tax returns after all of their deductions.
Anything over the conforming loan amount of $417,000 is considered a Jumbo Loan. A Jumbo Loan is still a conventional loan but now it is considered a non-conforming loan because it's higher than the limit of $417,000. Other conventional loans, regardless of loan amount, that are considered non-conforming are when a borrower cannot prove income, doesn't fit within the debt to income (DTI) ratio or doesn't have enough established credit or may even have some derogatory items on their credit report.
There are multiple other types of conventional conforming and non-conforming loans. Some examples would be Adjustable Rate Mortgages (ARMs), option ARMs, baloon payment loans and subprime. As you can see I could easily write a whole book trying to explain the different variations of conventional loans.
FHA loans
FHA loans or Federal Housing Administration are considered HUD loans or Housing and Urban Development. FHA loan limits are different in each county. For example at the time of this writing FHA loans here in Maricopa County are capped in the $263,000 range. Some counties in California are in the 400K plus range. There is currently some pending legislation that may increase these loan amounts as well as reduce the currently required 3% down payment to 0-1.5%
FHA loans are still the market rate and are quite often easier to obtain than a regular conventional conforming loan. The main difference between the two loans is that FHA is government insured to the bank. If a borrower defaults on a FHA loan, HUD steps in and buys the bad loan back from the bank and then sells it as a HUD repo. Because banks are insured by the government on FHA loans their underwriting criteria is less stringent than conventional conforming loans.
FHA does not do any type of stated income loans. Everything is full documentation, meaning pay-stubs, W-2s or 2 years of tax returns on self employed people that still show enough income to qualify after all of their deductions.
Advantages of FHA loans are; only 3% down, higher debt to income (DTI) ratios. FHA loans are also not credit score or FICO score driven. If you do not have the required 620-640 FICO score required on conventional conforming loans you can still get an FHA loan at the market rate. FHA does not like to see any 30 day slow or late pays on your credit in the last 12 months. They may accept 1 or 2 with good letters of explaination.
If you do not have established credit they will use 3 alternate trade lines of credit, these can be 12 months of utility bills, cell phone bill, auto insurance payments and etc. The lender will usually request a credit rating from your alternate trade line source. Foe example, they would ask your utility company for a 12 month payment history that the utility company would then generate and supply to the lender.
FHA also does not require you to have 2 months of house payment left in the bank as reserves after your down payment and closing costs. At the time of this writing FHA allows you to receive gift funds from a family member or a very close friend such as a God Parent. FHA also allows the seller to give you up to a 6% concession of the sales price. By receiving a 6% concession from the seller 3% can used towards your down payment and the other 3% can be used for your loan closing costs.
This in effect allows you to get into a home for $1,000 to $1,500. FHA does not allow the seller to pay your pre-paids. Pre-paids are any prorated daily interest if you do not close on the 30th of the month and any monies required to set up your impound account or escrow account. Your impound account is the account that is set up for taxes and insurance which allows your lender to pay your taxes and insurance directly when they become due.
FHA even allows non-owner occupied co-borrowers. Parents or family can co-sign for a young couple or an individual. The couple or individual should then make the first 6 house payments from their own checking account. After 6 months they can do a refinance without having to requalify and at the same time remove the cosignor completely from the loan. This is a great way to piggy-back the co-signors credit and income for 6 months and then remove them completely in the refinance. The refinance is called an FHA Streamline loan.
For many borrowers, FHA is a better loan. Everything about FHA is easier to qualify for than a conventional loan. With the recent tightening in the mortgage lending market FHA loans are making a strong come-back.
VA loans
VA stands for Veterans Administration. VA loans are government insured loans for veterans. VA will let the Veteran finance 100% of the purchase price. In order to insure the loan the VA charges a 3% VA Funding Fee (VAFF). The VAFF is financed back into the loan. The loan amount ends up being 103% of the purchase price. If the Veteran has at least a 10% VA related disability then they are exempt from the VAFF. The VAFF also decreases as the Veteran puts more down.
If you are considering using your VA loan if you have VA Eligibility please discuss your options in full with your lender. It often makes better since financially for the Veteran to go with an FHA or Conventional loan instead of financing in the 3% VAFF. You must take several things into consideration, the primary thing being how long are you going to be in the home?
In a buyers market it may be better to negotiate that the seller gives the Veteran a 6% concession and then go with an FHA loan. The main drawback would be if the Veteran is financing a home that costs more than the maximum FHA loan amount for that particular county. FHA loans have mortgage insurance and VA loans do not. You should have the lender pencil-out all of your options to see what works best for you.
* Information deemed reliable but not guaranteed. Buyer/borrower to verify all facts with their lender and or accountant.
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