Loan Programs
Types of Loan Programs
Basically loans fall into one of four categories:
1. Government
2. Conventional Residential
3. Portfolio
4. Private Equity Loan Programs
Government
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 competitive and down payment requirements are lower than conventional loans.
Some of the other benefits of FHA financing:
- Only a 3.5 percent down payment is required.
- Closing costs can be financed.
- Flexible underwriting criteria
- 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.
FHA Streamline
One of the best features about a FHA loan is the ability to qualify for a Streamline Refinance in order to help the homeowner lower monthly mortgage payments and interest rates. Some of the requirements to qualify include no mortgage lates in the past 12 months, owning the property for at least 6 months and you must have a minimum credit score of 640.
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.
- Counseling 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.
VA Streamline
A Veteran can qualify for a refinance also known as an Interest Rate Reduction Loan (IRRL) if they meet certain conditions. Some of the conditions include no mortgage lates in the past 12 months, have 10% equity in the property and a minimum credit score of 640. The good news is that income is not used in your qualification ratio.
Conventional Loans
Conventional loans are loans that are not underwritten by any government agency. These loans adhere to the Fannie Mae or Federal National Mortgage Association (aka Freddie Mac) guidelines which sets the maximum loan amount and requirements for borrowers.
Portfolio Loans
Portfolio loans are mortgage loans that are held by investment banks or savings and loan institutions rather than being sold on the secondary market. The institution usually uses their own money and therefore can set their own set of lending guidelines that may or may not conform to Fannie/Freddie standard guidelines. Another advantage of a portfolio loan is that the institution is usually more concerned with an individual’s savings history than being able to fully document income.
Private Equity Loan Programs
Private equity loan programs are usually funded by Hard Money Lenders. Hard money lenders serve a purpose for borrowers who suddenly find themselves with an exceptional opportunity but their current financial situation doesn’t allow them to qualify for other types of financing discussed above.