Finally, in addition to the loan term (e.g., 15 year vs. 30 year) or the payment structure (e.g., fixed rate vs. ARM), loan types differ with respect to the “investor” who is the ultimate source of the money the mortgage company is lending you. In many cases, the buyer will not be aware of who this investor is, but it is they who determine the “wholesale” interest rate at which your bank or mortgage broker gets the money to loan to you. And it is they who determine the rules under which the loan is made and the qualifications you have to meet in order to qualify for the loan. There are a few banks that do loan their own money. These banks can establish their own lending rules and their own procedures and requirements for qualifying buyers. But for the majority of U.S. mortgage loans, the bank or mortgage broker is really acting as a middle man between the borrower and the “investor” that is the actual source of the funds that are being loaned.
When defined in terms of the “investor” or source of funds, the vast majority of loans in the U.S. come from the following sources:
Conventional Loans. Most conventional loans are funded by either Freddie Mac or Fannie Mae, each of which has its own set of loan programs and rules. These programs have a maximum loan limit, which applies nationwide and changes from time to time. As of January of 2008, the general limit for conventional loans was $417,000. Traditionally, conventional loan programs required a minimum 5% down payment, with at least 3% of the funds coming from the borrower’s own funds rather than as a gift. In recent years, conventional loans of 97% and 100% of the purchase price have been offered, but the income and credit requirements are much stricter.
Jumbo Loans.: Loans that exceed the conventional loan limit established by Freddie Mac and Fannie Mae are funded by a multitude of investors, each of whom establishes their own programs, rules and qualifications. Generally, these loans will require a minimum of a 5% down payment. Most require 10% or more.
FHA Loans. Federal Housing Authority (FHA) loan programs were established by the federal government in order to minimize the financial impediments to home ownership. The standard FHA loan requires a 3.5% down payment. All funds required for down payment and closing costs can come as a gift from a relative or from certain other sources. Income requirements and other rules are comparatively liberal. Loan limits are established on a county by county basis. They are adjusted relative to housing costs from time to time. As of December 2003, loan limits for Boulder County were$348,460. In Weld County, across County Line Road to the east, they were $$274,550. In Broomfield and Jefferson Counties they were $308,370.
VA Loans. Veterans Administration loans are available only to eligible veterans. VA loans are limited to the ceiling set for conventional loans. The VA has offered 100% loans for many years.
Generally, interests rates for conventional, FHA, and VA loans will be very similar, although occasionally FHA or VA rates may sometimes be slightly lower than conventional. Jumbo loan rates will generally be 1/2 point to a full point higher than conventional loan rates since larger loans are perceived to involve higher risks for the lender. Given market competition, fees and closing costs will also be similar from one funding source to another, although fees for FHA and VA loans can be lower because FHA and VA regulations limit some fees.
Each of these investors offers a wide range of specific loan programs. Generally, these are based on the various loan terms and payment structures we discussed earlier. Building on this foundation, however, these investors (and others) have developed a near limitless array of specialized programs. There are special programs for borrowers with extremely good or extremely bad credit ratings. There are even specialized loan programs designed for medical doctors moving to establish a practice in a new city and for immigrants without green cards.
So, while it’s useful to know the basics, it’s impossible to know it all. That’s what a good loan originator, and their support network, are for (see Mortgage Lender Staff). Use their expertise to help you sort through the options. That’s what they do for a living.