Financing Programs
When buying a home for sale, there are several types of financing programs which vary depending on who is backing the loan. It is important to understand the different programs to ensure that the home buyer is selecting the best option. The most common types of financing are conventional and government backed loans, which are listed below:
Government Backed Loans- FHA Loan
The Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD) insures loans for 1-4 unit homes so that lenders can offer better deals such as low down payments, low closing costs and easy credit qualification. While FHA loans are great for first time home buyers as down payments can be as low as 3.5%, they are not limited to only first time home buyers. Loan limits differ depending on home type and city and not all lenders offer FHA loans, so it is a good idea to find an FHA approved lender or a mortgage broker to help find one.
- VA Loan
U.S. Department of Veterans Affairs (VA) guarantees loans up to $417,000 made by lenders to veterans and active duty personnel and offers benefits such as no down payment required, no mortgage insurance, comparable or lower closing costs. Many counties qualify for the Veterans' Benefit Improvement Act of 2008 which allows a loan guarantee up to $729,750 for homes purchased by December 31, 2011.
- Conforming Loans
Loans that meet the guidelines of Fannie Mae and Freddie Mac, which are government-backed mortgage trading companies that buy and sell loans. These types of loans are often favored by lenders because they can sell the loans to Fannie Mae and Freddie Mac to free up their capital. While loan limits for 2009 have been set to $417,000 for single family homes, certain high-cost areas have higher limits of up to $625,500 for single family / 1-unit homes. Check with different lenders or a mortgage broker to find out what the limits are in the areas you are looking to purchase a home.
- Non-conforming Loans
Loans that do not fall within the qualifications of Fannie Mae or Freddie Mac are considered conventional, but non-conforming loans because they cannot be traded. Since non-conforming loans cannot be sold, lenders usually charge a higher interest rate. Jumbo loans are typically non-conforming, but with the recent changes, certain jumbo loans qualify as super conforming or jumbo conforming and can be bought and sold by Freddie Mac or Fannie Mae. Non-conforming loans are often loans exceeding conforming loan limits, uncommon nature of a buyer's income and assets, or lack of sufficient credit.
- Unconventional Loans
Loans that are not conventional and are mostly known as sub-prime loans where loans can be made with no documentation required, poor credit, no down payment and interest only. Since 2008, unconventional loans are no longer available or extremely rare to find. The Federal Housing Administration however, has provided products to help buyers with lower income, lower credit scores to qualify for FHA loans given that they meet FHA requirements.
