Which Loan Works For Me?
As a borrower, you may have several options when it comes to selecting your loan-type. Determining your loan-type can affect your loan and payment parameters, so while we provide an overview here, we recommend partnering with your Starkey Mortgage representative to learn more about which loan-type would best benefit your individual circumstances.
A Word About Conforming and Non-conforming
You’ll frequently see the words “conforming” and “non-conforming” when referencing loans. A conforming loan is a mortgage loan that falls within government-sponsored enterprise (i.e., Fannie Mae and Freddie Mac) guidelines.
Reasons an applicant may not meet conforming loan criteria include credit history, recent bankruptcy, debt load, or problems securing documents surrounding employment, income, or assets.
When a borrower does not meet (or “conform” to) the guidelines of a conforming loan, he or she may wish to explore non-conforming loan options. Non-conforming loans generally offer a wider range of acceptance and will likely bear a higher interest rate than conforming loans.
Loan options that may be available
- Conventional, Conforming Fixed Rate Mortgage Loans
- Conventional, Conforming Fixed Rate Mortgage Loans—These loans are generally approved for a term of 15 or 30 years. A 15-year loan provides a tidy savings by shaving off the length of time you pay interest on the borrowed money. A 30-year loan offers more time to repay the loan and generally provides the homeowner with a lower monthly payment amount. Fixed Rate Mortgage Loans are deemed desirable because the interest rate and payment amount cannot increase over the life of the loan.
- Conventional Financing
- Often confused with “conforming” but very different, a Conventional Loan refers to a loan that is not backed, insured, or guaranteed by the US government. Conventional loans can be either conforming or non-conforming.
- Adjustable Rate Mortgage (ARM)
- An ARM bears an adjustable interest rate. Borrowers generally begin at a lower interest rate than that of a Fixed Rate Mortgage, but the homeowner can expect the amount of the monthly house payment to change over time as interest rates fluctuate. This is an ideal loan type for people who only plan to own their home for a short time or if interest rates are dipping.
- Jumbo Loans
- Loans that exceed FNMA / FHLMC limits are called jumbo loans. Jumbo loans are often used to purchase higher-priced homes and can carry higher interest rates and points. Larger down payments are usually required on these loans. It is a good idea to speak with your Starkey Mortgage representative to learn about the conforming loan limits in your area. Some areas that the federal government designates as high-priced home markets may receive a higher limit in a conforming loan program.
- Non-conforming Jumbo Mortgage
- A Jumbo Loan is a loan that exceeds the conforming loan limit. The conforming loan limit is determined by the two government sponsored enterprises Fannie Mae and Freddie Mac and is currently between $417,000 and $625,500 for a single-family home, depending upon where you live. A Jumbo Loan may have more stringent criteria, such as a lower debt to income ratio, a larger down payment, and/or proven availability of cash reserves.
- Federal Housing Administration (FHA) Loan
- Created as part of the US National Housing Act of 1943, the Federal Housing Administration, (FHA) loan was designed to help stabilize the nation’s home financing system. Loans through FHA generally involve a lower down payment as compared to conventional loans; however, the loan amount may have limitations. FHA guidelines are generally not as strict as government-sponsored enterprises like Fannie Mae and Freddie Mac. The FHA does not technically extend the money to the borrower; rather, it guarantees the loan so the private lenders do not have to assume all of the risk associated with recouping the money. The disadvantages to FHA loans are that county loan limits may be inadequate in high-cost areas, and home appraisals may contain more repair requirements than conventional loans.
- FHA loans made before December 15, 1989 are fully assumable and can be creatively financed. Loans made after December 15, 1989 can be assumed at the same interest rate with qualification.
- Department of Veteran Affairs (VA) Loan
- The Veterans Administration (VA) loan program is funded by community mortgage companies, but backed by the US Department of Veteran Affairs. Borrowers are eligible for VA Loans if the property to be purchased will be owner-occupied and they are Veterans, active military personnel, the military reserve, the National Guard, or in some cases are a surviving spouse. It may be possible for a veteran to obtain a 100% loan up to the current loan limit with no down payment, and the seller or builder is allowed to pay all of the veteran’s closing costs, making the total cash required to purchase, in some instances, zero. If the veteran desires a higher priced home, he or she is generally required to make a down payment on the amount exceeding the current guaranteed loan limit. Historically, the Veterans Administration was more liberal than conventional lenders with regard to the veteran’s credit standing and qualifying for the VA loan, but recent changes to VA underwriting practices now make the qualifying criteria similar to conventional mortgages.
- Interest-Only Mortgage
- Interest-Only Mortgages afford the homeowner lower payments by only requiring the interest payment for a set period of time, generally in the 5-10 year range. Interest-Only Loans may be ideal for someone whose income fluctuates or for someone who reasonably anticipates a sizeable increase in future income.
- City, County, and State Bond Programs
- Local programs for a city, county, or state bond loan are often, but not always geared to first-time home buyers. The property needs to serve as the borrower’s primary residence. The bond programs are sponsored by regional Housing Finance Agencies (HFA), who try to provide a rate that may be 1/2 to 3/4 of a percent lower than the current market rate, resulting in lower loan payments for the borrower. Other advantages of a bond program loan are tempered fees and potentially stronger purchasing power.