When you get a mortgage, you’re actually choosing from a number of different loan options.
Many people will end up with a conventional loan, but there are a few scenarios where, if you meet certain criteria, you may be eligible for discounted closing fees, lower interest rates, or both.
Purchase vs. Refinance Loans
There are two major loan types to start:
In many cases, loan products can be used for both purposes. There are, however, specialty loans that are specific to each.
For purchase loans, there are a few core products you should know about. The first is a conventional mortgage, also sometimes called a conventional home loan or conforming loan. These are loans backed by Fannie Mae and Freddie Mac, two major government-sponsored entities.
These types of loans are the most commonly chosen. According to RealtyTrac, nearly 65% of all mortgages in 2015 were conventional loans.
The qualifications to get a conventional loan are laid out by the government agencies and are generally the same across all lenders. They require as little as 3% down, and the loan amount must be less than the agency lending limit for the area.
High Loan-to-Value (or low down payment) Loans
Another type of loan that is very common, especially for first-time home buyers, are high loan-to-value (LTV) loans. These loans have qualifications that are set by the same government agencies as conventional loans, but are specifically for home buyers who have low down payment amounts. These loans require anywhere from 3% to 19% down.
The major difference with high LTV loans is that they require mortgage insurance, which is an added cost to the borrower. To see how mortgage insurance affects a loan, you can check out, “How Loan-to-Value Ratio Affects Mortgage Insurance.”
Say you live in an area with high home prices, or are looking at a particularly nice home, and your loan would be over the agency lending limit. Then what?
Now you’re in ”jumbo loan” territory, also called “super conforming mortgages.” While the name might be intimidating, jumbo loans are fairly common in places like California where real estate prices are very high.
These loans are remarkably similar to conventional / conforming loans, but carry a few added requirements. Jumbos may require a minimum of 10% down, as is the case with Freddie Mac. It also carries additional underwriting requirements, which translates into more paperwork for you as the borrower. A borrower’s credit score also plays a larger role in qualifying for a jumbo loan.
Otherwise, jumbo loans function similarly to most other loans. Payments are calculated roughly the same way, mortgage insurance still applies for loans with an LTV of more than 80%, and the debt-to-income (DBI) limits are still in place.
Super Jumbo Loans
Homes valued at over $2 million dollars fall into a different type of loan category. This is a rarity for most people, so we won’t go in-depth here. If you’re curious, you can read more about it from CNBC.
High Cost Loans
There are a few things that can trigger high cost loans, but it generally comes down to fees. If the fees to close a loan exceed a certain amount or drive the APR above a certain limit, they become subject to additional rules. To learn more about high cost loans, you can visit the CFPB or the FTC.
If you are a veteran of the armed forces, we’d like to start by saying thank you for your service.
Because you served your country, you are entitled to special mortgage benefits: you qualify for a VA loan. The biggest advantage with getting a home loan from the VA is the ability to purchase with 0% down. VA loans also do not require mortgage insurance, so if your down payment is below 20% of the home value, you could save thousands of dollars per year in mortgage insurance premiums.
Together, these two benefits make homeownership more attainable for vets, as well as very cost-effective. Not all lenders can originate VA loans, so if this is something that interests you, make sure to do your research and find the right lender partner.
Federal & State Grants, Down Payment Assistance, and Other Specialty Programs
There are a lot of specialty programs that exist to help home buyers who would otherwise have difficulty purchasing a home.
These programs exist at the federal, state, and city level. They offer everything from help covering your closing costs, outright grants (no repayment), to 0% interest loans to cover your down payment (paid back when you sell the home).
Most programs have restrictions — you need to purchase in a specific area, have an annual income less than a certain amount, etc. Some banks and mortgage companies are equipped to do these specialty loans, some do not, and not all loan officers are familiar with all of the programs.
It pays to do your own investigating here. Research the various programs you may qualify for, and then find a good lender who specializes in this product type to see if you qualify. A few places you can start your research:
- State Housing Finance Authorities
- HUD Homes Programs
- National Homebuyers Fund – A non-profit that offers assistance programs.
- State and County Community Development Offices – Many states and counties have agencies devoted to driving affordable housing. As an example, you can visit the California HCD site.