Start 2015 off Right...
The news last month that Fannie Mae and Freddie Mac were each going to begin backing mortgages with as little as 3% down certainly caused some controversy (http://www.bloomberg.com/news/2014-12-09/fannie-freddie-3-down-loan-seen-as-helping-too-few.html ). These low down payment loans are seen as a tool to help low income borrowers afford homes, and do come with requirements designed to limit risk (home ownership counseling and PMI or private mortgage insurance). However, these types of loans contributed to the financial meltdown of 2008, and there is concern that this could happen again, despite the enhanced regulatory environment and greater restrictions placed on eligibility.
Regardless of how one feels about these particular types of home loans, the fact is there are a variety of loan programs available to all types of consumers, each with their own guidelines and eligibility requirements. We kick off 2015 with a brief overview to help you better understand some of these basic mortgage programs and terms.
Fixed Rate Mortgage: This is a mortgage loan that has the same interest rate for the entire repayment period.
Adjustable Rate (ARMS): The mortgage interest rate will change or "adjust" after an initial fixed period at the start of the loan. For example, a loan described as a 5/1 ARM is a loan that will have a fixed interest rate for the first 5 years (this is the 5), after which the rate will adjust annually (this is the 1).
Conventional Loan: These are privately backed loans not insured or guaranteed by the federal government. These loans may require a higher down payment, but allow a borrower who provides a 20% down payment to avoid PMI (private mortgage insurance). With a lower down payment, PMI may still cost less than insurance required by a government backed loan.
Government-Insured Loans: These loan programs are backed or insured by the federal government and include the following programs:
FHA (Federal Housing Authority): A mortgage program managed by the Department of Housing and Urban Development (HUD). Loans are available for a variety of borrowers, with down payments as low as 3%. These loans are insured by the government against default. These loans do require mortgage insurance.
VA (US Department of Veterans Affairs): These are loans offered to military service members and their families and are also guaranteed by the government. These programs may include 100% financing for a home purchase, based on eligibility guidelines.
USDA/RHS: Loans offered to rural residents who meet certain income requirements.
PMI (Private Mortgage Insurance): This is insurance that the borrower obtains to ensure that the lender will be repaid the balance of a mortgage if the borrower cannot pay, or defaults. It is often required for loans with down payments of less than 20%.
Borrowers can combine types of mortgages listed above, for example, an FHA loan with a fixed interest rate, or a conventional with an adjustable rate.
And because you are probably curious...
Fannie Mae/Freddie Mac: These are government controlled corporations that are the largest source of home financing in the country. Essentially they purchase and sell mortgage backed securities. Their purpose is to attract investors to the mortgage market to generate lending opportunities by increasing the pool of money available to lend.
As always...
Individual circumstances differ, so it is best to consult with a qualified mortgage professional who clearly understands each product and can explain guidelines and eligibility requirements, answer questions, and make recommendations based on income, assets, credit scores and other qualifying information.
Questions, concerns or feedback, or a topic you would like to discuss? You can email me at mgalatis@fairwaymc.com
This information is not intended to be an indication of loan qualification, loan approval or a commitment to lend. Other limitations may apply. ©2015 Fairway Independent Mortgage Corporation NMLS ID 2289 (www.nmlsconsumeraccess.org) Equal Housing Lender Massachusetts Mortgage Lender License #17159 .
