There is often a lot of confusion about the names and types of mortgages available in the market place. Here is some general information to address some of the confusion.
I. “Government Loans” are mortgages that are either insured or guaranteed by the government or a government agency. They include FHA, VA and USDA loans.
A. FHA or Federal Housing Administration mortgages are insured by the FHA and they offer more flexible down payment and underwriting guidelines. They are not just for first time homebuyers, but are available for all borrowers who qualify – for both purchases and refinances. FHA also allows “As Is” purchases.
B. VA or Veterans Administration mortgages are guaranteed by the VA with very flexible underwriting and down payment guidelines for veterans and their spouses only. VA loans have low interest rates, no mortgage insurance, and no down payment requirements for most veterans. VA financed purchases require clear Section I termites (no “As Is” allowed).
II. A Conforming mortgage “conforms” to Fannie Mae (Fannie) and Freddie Mac (Freddie) underwriting guidelines and is therefore eligible for purchase by Fannie and Freddie. Fannie and Freddie are the quasi-governmental organizations set up to create a secondary market for mortgages (outside of banks alone). The majority of all mortgages obtained in the United States are conforming. Conforming loans must comply with the loan limits in a particular county; for example, in most areas in California, the loan limits range from $424,100 to $636,150. In the Bay Area and other high end coastal locales, the county loan limits are usually $636,150.
III. Conventional mortgages should not be confused with “Conforming Mortgages.” Conventional mortgages are institutional mortgages that are not insured by the FHA (Federal Housing Administration), or guaranteed by the VA (Veterans Administration), or the U.S. Department of Agriculture. In other words, conventional mortgages are most institutional mortgages other than “government loans,” as discussed above. Conventional mortgages include conforming loans, but they also include jumbo and portfolio loans.
IV. A “Jumbo Mortgage” is a loan that exceeds a particular county’s loan limits (see “Conforming” above). Jumbo mortgages usually have stricter underwriting guidelines because they are not backed by Fannie Mae or Freddie Mac, but are instead held by banks or private funds. Stricter guidelines include tighter debt ratio requirements, larger down payment and reserve requirements, and tighter credit standards.
V. ARM is an acronym for Adjustable Rate Mortgage. ARMs were much maligned after the housing crisis because of their undisclosed adjustments, balloons and other harmful terms. But today’s ARMs usually come in the form of 5, 7 or 10 year fixed periods before converting to a one year adjustable. They are straight forward nowadays and they sometimes are the best option for borrowers with shorter time-horizons.
VI. Balloons are loans that are amortized over a longer fixed period, 30 years for example, but come due in full long before the amortization period ends. Very few lenders offer balloons these days.
VII. Hard Money or Private Money refers to loans that are usually offered by private individuals or non-institutional investors. These lenders focus entirely on the property and ignore credit standards. Because of this, they require much larger down payments (30% or more) and they charge much more (higher rates and fees).
VIII. Non-QM Loans refer to “Non Qualified” mortgages. These are the loans currently offered by some large funds that bridge the gap between standard FHA/Conventional financing and Hard Money. Non-QM loans have replaced the segment that used to be known as “Sub Prime” but the lending is much more responsible now with more stringent down payment and income requirements.
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