Written by Louis Wilson on 07/01/2019
There are three main types of mortgages: Conforming loans, non-conforming loans and government backed loans. This article is designed to give the first-time home buyer a brief overview of the different mortgage products out there. Please also check out our post about mortgage rate types.
When someone says a loan is "conforming," they mean that the loan conforms to guidelines set by Freddie Mac (the Federal Home Loan Mortgage Company) and Fannie Mae (the Federal National Mortgage Corporation). Freddie Mac and Fannie Mae have guidelines on the loan limit (less than or equal to $484,350 in 2019), the maximum loan-to-value ratio, the minimum credit scores accepted, and documentation requirements.
Freddie Mac and Fannie Mae are government-sponsored enterprises (GSEs) created by the government to provide liquidity to the mortgage market. They buy the loans from lenders and pool them together to create an investment vehicle called a mortgage-backed security. Freddie Mac and Fannie Mae then turn around and sell mortgage-backed securities to banks and investors on Wall Street.
Non-conforming loans are unable to be purchased by Freddie Mac and Fannie Mae, meaning that lenders have a harder time getting these loan types off their balance sheet. To compensate lenders for this, they will typically charge higher rates or require a higher down payment.
These loans are guaranteed by the US government. The three most common government loans are the FHA, VA and USDA loan programs. These loans exist to help people with lower income or lower credit to qualify for financing to purchase a home that they would not otherwise be able to afford.
FHA Loans: FHA loans are backed by the Federal Housing Administration. To qualify, houses must be owner occupied. For borrowers with credit score greater than 580, FHA loans require a minimum of a 3.5% down payment. For borrowers with a credit score below 580, a down payment of at least 10% is required.
VA Loans: VA loans are backed by the Veterans Administration. Aimed at veterans and/or their spouses, the most notable aspect of a VA home loan is its ability to provide a mortgage with zero down payment. In order to qualify, the borrower must be an active duty member or veteran of the US Armed Forces. It also requires a Certificate of Eligibility from the VA.
USDA Loans: USDA loans are backed by the United States Department of Agriculture and help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes.