Mortgage Loan Types and Programs
There are many different types of loans and loan programs. A loan product is defined as a loan type with a particular loan program. We advise you to do your research and learn which loan product works best for you. Home Loan Enterprise offers loan products for the following loan types: conforming, super conforming, and jumbo. For all other loan products, please contact our mortgage finance advisors directly.
A conforming loan is based upon a dollar amount limit set by the Office of Federal Housing Enterprise Oversight (OFHEO). The OFHEO is the federal regulator for Fannie Mae and Freddie Mac. What it essentially does is oversee the two government sponsored enterprises (GSE) to make sure that they are fulfilling their mission of promoting home ownership for people with lower incomes and those in the middle class.
Currently, the maximum loan amount limit for conforming loans is $417,000. This is the most common type of loan and is most likely to provide you with the lowest rates and fees, if you are looking for a loan for this amount or less. This type of loan is often referred to as a conventional loan.
Super conforming loan is relatively new and was introduced in January 2009 by The Economic Stimulus Act. It was created in response to the changes in the market between the years of 2006 and 2008. During these years, there was a staggering lack of funds for those looking to acquire loans for more than the conforming amount limit of $417,000. The maximum loan amount limits for super conforming loans vary from county to county.
If super conforming loan is right for you, please contact us.
Prior to the existence of super conforming loan, jumbo loan was available to consumers for any loan amounts over the conforming loan limit. Today, jumbo loan only covers loan amounts exceeding the super conforming loan limits. Jumbo loans are standard when dealing with high-end homes, where the loan amount can reach millions of dollars. Due to the downturn in 2006 that lasted until 2008, these loans subsequently dried up. They became much too risky for any investor.
Beginning in 2013, jumbo loan seems to be making a comeback. Typically, the limits for these loans are between $1.5 million and $2 million. Due to the fact that Fannie and Freddie are not the typical investors for this type of loan, we are seeing more private investors offering this type of loan.
Home Loan Enterprise is ready to help you with your jumbo loan. If you have any questions, please contact us.
FHA stands for the Federal Housing Administration. An FHA loan is unique because it is a loan that is backed directly by the FHA instead of Fannie Mae or Freddie Mac.
If you are a first time home buyer, with little down payment, traditionally, this is the loan for you. We say “traditionally” because this type of loan has been around for a very long time. It was introduced by the government during the Great Depression to help Americans with home ownership. You can obtain these types of loans with as little as a 3.5% down payment.
VA stands for Veteran’s Affair. VA loans are very similar to FHA loans because they are backed by the Department of Veteran Affairs not Fannie Mae or Freddie Mac.
To qualify for this type of loan, you must be a veteran and be able to produce a certificate that proves that you are eligible. These certificate show your record of service in the military. The great thing about these loans is that you can get up to 100% financing with little to no down payment.
Subprime loans are what caused the real estate and mortgage crisis in America between 2007 and 2008. At that time, these loans were offered to individuals with low credit scores, down payments and incomes. They were given lower interest rates, but were charged higher premiums. These standards were exactly what sparked this crisis. People who were usually unable to qualify for loans were then able to buy homes and caused a huge surge in real estate prices.
People often used these loans to buy homes and “flip” them to make a profit mistakenly believing that there were no risks. That also contributed to the housing crisis. Subprime lenders were growing at such a rapid pace during the housing boom of 2003 and competed directly with traditional products because they were able to offer comparative interest rates. Investors favored these types of loans because of higher returns.
When rates adjusted after initial period, borrowers’ were stuck with increased payments which were sometimes doubled. At that time, investors were not yet concerned because home values continued to increase. Even if borrowers could not make their payments, the investors believed that they could always foreclose on the house and make a good return regardless. However, when prices started to come down, investors incurred huge losses. It was a huge crisis as real estate deteriorated unpredictably and borrowers were increasingly defaulting on their subprime loans at an alarming rate.
The largest subprime lenders at that time were Ameriquest Mortgage, New Century Mortgage, BNC Mortgage, First Franklin, WMC, and Countrywide. They have all since been shutdown, filed bankruptcy, or been bought by other banking entities at discounted prices. There still may be subprime mortgage lenders and if the housing market improves we might see these types of loans come back.
This type of loan is not currently available.
Alt-A or Alternative A-Paper loans are loans that are usually lacking some type of documentation from the borrower. The lacking documents can be anything like proof of income, proof of assets, or any other essential loan documents. Although borrowers may have perfect credit scores, the lack of documentation makes these loans risky to lenders. Some lenders consider these higher risks loans because of the higher interest rates they can charge. This type of loan is not very popular in the current market but may return.
This type of loan is not currently available.
Hard money loans are loan backed by private lender that can be used for both residential and commercial real estates. Because these loans are usually extremely risky, there are no traditional financial lenders that offer this type of loan. Private lenders justify their investments based on the equity of the property they are lending for. Lower loan-to-value (LTV) properties are less risky and more attractive to hard money lenders. If borrowers failed to make their payments and foreclosed, these private lenders can still recover their losses from the equity of these properties. Typically, interest rates for hard money loans are extremely high.
We do not offer this type of loan.
Properties that require commercial loans are apartment buildings, office buildings, shopping centers, and other commercial properties. Commercial loans have many upfront costs and face many regulatory hurdles. Federal or state chartered banks and credit unions are primary investors for these loans. Guidelines for commercial loans can differ tremendously amongst different lenders. It can be a challenge to shop for this type of loan.
We do not currently offer this type of loan.
Conforming, super conforming and all other types previously mentioned are available with different loan programs. A loan program together with a loan type is referred to as a loan product. Below are loan programs and loan types that when combined together forms the loan products available.
40, 30, 25, 20, 15, and 10 Year Fixed
A fixed loan means that the interest rate you lock in will not change throughout the entire life of your loan. Because of inflation and uncertainties in the housing market, fixed loans generally have longer terms to provide borrowers with added security at the cost of higher prices, interest rates, and monthly payments. These loans give you, the borrower, security in knowing that your payments will never change. This makes planning for your future easier. 40, 30, 25, 20, 15, and 10 year fixed loans are the most common loan programs today. 30 and 40 year fixed rate loans are recommended for first time home buyers and for those with large loan amounts. Choosing these longer term loan programs, your monthly payments will be lower than the shorter term loan programs such as 15 or 10 year fixed loans. The 15 and 10 year fixed loans are good for borrowers who want to pay off their loan faster or have smaller loan amounts.
Finding out what loan programs you qualify for may also play an important role in deciding which loan program is right for you. Typically, longer term loan programs are easier to qualify for because they result in lower monthly payments. To find out what loan programs you qualify for, please run a quote on our website and contact our mortgage finance advisors.
10, 7, 5, 3, and 1 Year ARM
An adjustable rate mortgage (ARM) is basically a loan with a fixed interest rate for an initial number of years with adjustments as often as once a year thereafter. A 7 year ARM with adjustments every 2 years is written as a 7/2 ARM. Likewise, a 5 year ARM with annual adjustments is described as a 5/1 ARM. However, because annual adjustments are more common today, 5/1 ARMs are referred simply to as 5 year ARMs.
Even though you will be making payments for 30 years on this kind of loan program, interest rates and monthly payments are only fixed for the initial 1 to 10 years depending on the term you choose. After the initial fixed rate period, your interest rate may rise yearly and, in turn, drastically increase your monthly payments. How the interest rate adjusts depends on the financial index tied to your mortgage and lender markups.
The terms in which the interest rates adjust in ARM loan are described as “caps”. Caps are described in three different attributes: The most the interest rate can increase by at the initial adjustment period, also referred to as the “initial cap”. The most the interest rate can increase by during subsequent adjustment periods, also referred to as “subsequent cap”. The most the interest rate can increase by for the life of the loan, also referred to as “life cap”.
For example, a 5/1 year ARM, with an initial interest rate of 1.5% and caps of 3/2/5, means that your interest rate will stay fixed at 1.5% for the first 5 years and may increase up to 4.5% (1.5% + 3%) on the sixth year and up to an additional 2% every subsequent year up to a maximum of 6.5% (1.5% + 5%) for the life of the loan.
ARMs are less secure and stable but are often available at lower initial interest rates. Because of this risky nature, it is not recommended unless you are planning to sell the property or refinance by the end of the initial term of the loan. To better understand the risks that accompany this type of loan, please contact us.
10, 7, 5, 3, and 1 Year Interest Only ARM
If you choose to pay interest only on an ARM loan, the benefits are similar to a traditional ARM loan but the risk can be higher. Investors often use these loan programs to maximize their investment potential by keeping their payments low and holding on to their cash. The monthly payments are calculated by multiplying the interest rate with the loan amount then dividing it by 12 months. These drastically low monthly payments do not reduce the loan principal and therefore introduce significant liabilities. If you are a savvy investor, do not hesitate to contact us.
Option ARM (Negative Amortization)
An option ARM loan with negative amortization is a loan that does not exist at the moment. It was available before the housing collapse and was utilized frequently during that time. This loan program was set up so that the borrower could make minimum payments on the interest of the loan only. Most people who chose these loan programs did so because the minimum payment was so small. In most cases, it allowed them to purchase homes that they would otherwise not be able to afford. Because borrowers rarely made more than the minimum required payments, the loan principal increased adversely.
When the housing market was doing well, these loan programs worked. Borrowers had a low monthly payment, and investors bought as many rental properties as possible to maximize their profit. Real estate prices were high enough and rising to the point where constantly increasing loan principals did not deter borrowers or concern lenders. The high value of homes provided an exaggerated safety net for borrowers and lenders. When the housing market crashed, these loan programs were detrimental to borrowers, investors, and the housing market.
A home equity line of credit (HELOC) is a very common way to borrow money against the equity of the home you own. It is traditionally used as a credit line, similar to a credit card. Essentially, you are using your home as collateral for a second mortgage. Primarily, homeowners utilize these loans to fund short term purchases or home renovations.
With a HELOC, you are given a specific credit limit and a “draw period”. A draw period can be anywhere from 5 to 25 years in which the line of credit is available to you. You can continuously draw funds up to the limit over a period of time or draw the maximum limit amount in a lump sum. The terms of your repayment may vary amongst different financial institutions. Some may require that you pay both interest and principal together, whereas others may just require the interest only. There will always be a minimum monthly payment required regardless of institutions.
It is extremely important to remember the risks that are involved with this program. This is your home on the line. You do not ever want to be delinquent in payments or default on this loan. You may lose your home!
Similar to a HELOC, a fixed second mortgage is a second loan or lien against your home. Unlike a HELOC, the interest rates are fixed, there is no draw period, and there are no interest only payment options. Fixed seconds are similar to 15 or 30 year fixed conforming loan products. The interest rates are usually higher than your first mortgage because it is considered more risky by investors.