Basically, there are four categories of mortgage loans; FHA, VA and Conventional Conforming and Conventional Non-Conforming (“Jumbo”) loans. The following is a brief explanation of each.
FHA loans were created by the U.S. government in the mid 1950’s to make it easier for first-time homebuyers to get into homes. They are insured by the U.S. Dept. of HUD and are an excellent choice for people who are:
- Limited on available cash – the required down payment is only 3.5% of the sales price. The seller is permitted to pay all of the buyer’s closing costs and pre-paid expenses up to a maximum of 6% of the sales price.
- Getting a gift from a relative for any or all of the funds needed for down payment or closing costs. FHA allows anyone who has a vested interest in a borrower’s well-being to gift them the money needed for down payment and closing costs. If you intend to use gift funds for your purchase, please discuss with your loan officer. There are specific procedures which must be followed.
- Allow lower credit scores. Most investors are now requiring minimum credit scores of at least 640 but the good news is that on FHA loans credit scores are not taken into consideration for determining interest rates as long as minimum score requirements are met.
One of the biggest advantages to FHA loans is that they are “assumable”. That means that when a borrower wants to sell their home the prospective buyer may qualify for the original loan, give the seller the equity which has been earned and “assume” the interest rate, loan balance and payment. This can be a huge marketing advantage if interest rates are significantly higher at the time of sale. The only drawback for FHA loans is the mortgage insurance premium which is required. In 2011, the Dept. of HUD increased both the up-front premium (which is normally financed as part of the loan) and the required annual premium (which is paid as part of the monthly payment). The current maximum Sales Price for an FHA loan with minimum down payment in the Greater Austin Area is $345,595.00.
VA loans are for veterans of the U.S. armed forces only. They are guaranteed by the U.S.Veterans Department. They are an excellent choice for:
- Veterans who want to purchase a home with “0” down payment. Although a “down payment” is not required, there are closing costs and pre-paid expenses which need to be paid. The veteran is prohibited from paying certain closing costs — these “non-allowable” closing costs are typically paid by the seller. If the seller is unable or unwilling to pay the non-allowable closing costs the lender may pay them if the borrower is willing to pay a slightly higher interest rate.
- Disabled veterans who want to invest less than 20%. If a veteran has at least a 10% service related disability, he/she is exempt from having to pay for the funding fee which most veterans would have to pay.
A couple of things to keep in mind on VA loans is that only veterans and their blood relatives (i.e. spouse, children) may be on the loan. Capstar uses the Conventional Conforming limit for VA loans which is currently $424,100.00. VA loans may be assumed by anyone who qualifies but if a veteran allows a non-veteran to assume their loan they will not be able to buy another home with a VA loan until the assumed loan is paid off. A veteran may only have one outstanding VA loan at a time.
Conventional Conforming Loans:
Conventional conforming loans are neither insured nor guaranteed by the federal government. They may be a good choice for people who:
- Have at least 5% to invest for their down payment;
- Can invest 20% — they won’t be required to pay for mortgage insurance in this case;
- Have excellent credit scores – Credit scores are a major determining factor in what interest rates a borrower will receive.
The current maximum loan amount for Conventional Conforming loans in the Greater Austin area is $417,000.00. Conventional loans are not assumable.
Conventional Non-Conforming (“Jumbo”) loans
“Non-Conforming” simply means that the loan limits which Fannie Mae and Freddie Mac have established are being exceeded. Any loan amount in excess of $417,000.00 is considered “Non-Conforming” or “Jumbo”. Non-conforming loans require larger down payments and interest rates are generally higher. Underwriting guidelines are a little more stringent than conforming loans.