When it comes time to finance the purchase of your new home, picking the right loan product can make it easier to get qualified and save you a significant amount of money over the course of the loan term. Prior to the financial crash that led to the recession, borrowers had a bewildering range of choices when it came to mortgage financing. That’s not as true today, but it still makes sense to choose from the limited selection wisely.
Prior to 2007, all of the major banks, insurance companies and other corporations with money to lend had their own brands of home loans for sale to home buyers. These loans were sold by banks and mortgage brokers on behalf of these investors, who ultimately funded the loans so people could buy homes. Not all of those products served borrowers the way they had hoped. After the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act, was signed into law in 2010, most of those products disappeared.
Today, consumers have access to fewer financing tools from a far more limited set of investors, but they each have their differences.
These mortgage loan products are offered by Fannie Mae and Freddie Mac, the former quasi-governmental institutions that are now in conservatorship to the federal government. The vast majority of all mortgages written today are purchased by these big investors. Their products have been called the “plain vanilla” offering by the industry. They offer little flexibility in their underwriting guidelines; in fact, any loan product that meets their underwriting requirements is said to be “conforming.”
Offered by a division of the U.S. Department of Housing and Urban Development, FHA loans have long been a tool to increase homeownership. These loans are provided by the same banks and mortgage companies that provide conventional loans, in which the Federal Housing Administration insures against default. These loans are designed for low- to moderate-income borrowers. The qualifying guidelines are typically more lax than the conventional guidelines. One key feature of FHA loans is their lower down payment requirement.
Veterans of our armed forces may qualify for a mortgage loan guaranteed by the Department of Veterans Affairs. These VA loans are not really offered by the government, but the VA offers lenders who provide financing to these borrowers a guarantee should the borrower get into trouble.
When borrowers want to buy more home than most lenders want to lend against, they opt for a jumbo. Different investors have their own kinds of product for this market. Investors who offer jumbo loans give borrowers access to higher loan limits, but they also have tougher underwriting requirements and can cost more than conventional loans.
Loans from any of these sources can come in a number of flavors, including fixed interest rate or adjustable interest rate, and with various terms, from 5 years for some adjustable-rate loans up to 40 years for some. Traditionally, the terms on mortgages are either 15 or 30 years, with most borrowers opting for the latter.
To find out more about the different sources that provide home financing and the features and benefits of the different loan products they offer, visit with your bank or mortgage lender.