The mortgage industry can be very confusing. Understanding the different types of loans can save borrowers money on monthly payments. There are 6 major types of mortgages: Conventional, Jumbo, VA, FHA, USDA, and Reverse.
Congress established a financial services corporation called government sponsored enterprise ("GSE"). Their intended function is step up government backed loan types. One way to differentiate loan types is based on their GSE eligibility.
Conventional loans are GSE loans as they meet the requirements set forth by two GSEs, Fannie Mae and Freddie Mac. One of the main components of determining if the loan is conforming is the loan amount. When the loan amount is under $417,000 and meets the requirements of the GSEs, the loan is conforming. The conforming limit is $417,000, however this figure can change by state and year.
If a loan meets the requirements of Fannie Mae and Freddie Mac, but the loan amount is above $417,000, the loan is a "Jumbo" loan or non-conforming. Jumbo loans are bigger in size and carry higher mortgage rates as a result.
LESSON - If a buyer is buying a house for $525,000, the 20% down payment would be $105,000, and the loan amount would be $420,000. This is a Jumbo loan as the loan amount is above $417,000 - even if the loan meets the criteria of Fannie and Freddie. Jumbo loans carry higher mortgage rates so by increasing the down payment to $108,000 (or $3,000), the loan would be $417,000 (conforming loan), the mortgage rates would decrease from jumbo rates to conforming rates. As a result, the borrower would save money on the lower interest rate.
FHA Loans are insured by the US Federal Housing Administration. FHA insured loans are a type of federal assistance and allow lower income Americans to borrow money for the purchase of a home. Typically, first-time buyers qualify for FHA loans.
VA loans are guaranteed loans by the US Department of Veteran Affairs. The VA loan is designed to offer financing to eligible American veterans when private financing is not generally available and to help veterans purchase properties with no down payment.
USDA loans are home loans offered to rural property owners by the US Department of Agriculture. The USDA loans are guaranteed loans. The property must be located within the USDA RD Home Loan Map.
A Reverse Mortgage is a type of home loan for older homeowners that requires no monthly mortgage payments. Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they or their family sell or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. Borrowers are still responsible for property taxes and homeowner’s insurance.
