Types of Loans

Over the past few years, many new loan programs have been added to the basic programs that have been around for decades. The new programs help borrowers with varying financial situations to obtain financing to buy a home or refinance an existing mortgage. Below are a number of loan programs and a brief description of each. There are others, but these represent the programs most commonly used to buy or refinance.

Conventional Loans

Conventional loans are ones that meet the guidelines of Fannie Mae and/or Freddie Mac, the two very large secondary market businesses that buy mortgages from lenders and resell them to investors. Typically they are fixed rate loans of 15 to 30 years duration and range as high as $252,700. For people who qualify, they are the lowest cost loans generally available.

Jumbo Loans

These are loans that are for amounts above what can be offered as conventional loans ($252,700). The interest rate on a jumbo loan is usually ¼% to 3/8% higher than conventional loans. Qualifying guidelines are a little different also.

Non-Conforming Loans

Also known as sub-prime or B/C loans, they are designed for borrowers who have either had credit difficulties or need a loan that has more flexible guidelines than found with conventional financing. Interest rates on non-conforming loans are one to three or more percent higher than conventional loans.

Construction/Perm Loans

These loans are designed for people who want to build a new home. During the construction period, the lender advances funds to the general contractor as building progresses. During the construction period, the borrower pays interest only on the money already advanced. Once the home is complete, the loan becomes the permanent financing on the home.

No PMI Loans

Loans with a loan-to-value ratio over 80% usually require PMI (private mortgage insurance) that insures the lender against borrower default. Normally the cost of the insurance is tacked on to the monthly loan payment in the form of an insurance premium. No PMI loans avoid this add-on, but the interest rate is higher. (Usually the lender will buy mortgage insurance for the loans anyway, but they pay the premium rather than the borrower.) Since the extra interest charged on the loan is usually tax deductible, this feature can save certain borrowers money.

No Down Payment Loans

These loans are for the full value of a home. They allow buyers to purchase a home without making the normally required down payment. Sometimes these loans can be for amounts above the price of the home so the extra covers part of the buyer’s closing costs. In most cases buyers must have excellent credit to qualify for these loans.

FHA and VA Loans

FHA and VA loans are insured or guaranteed by the government and qualification is usually a little different than with conventional financing. For example, FHA loans are more tolerant of mild derogatory credit than conventional loans. VA loans finance 100% of the purchase while FHA loans finance 97% of the purchase.

Limited or No Documentation Loans

This category of loans limit the amount of documentation necessary to qualify for the loan. There are “no income documentation” loans and “no asset documentation” loans. The no income doc loans are useful for those who have a difficult time verifying their income, such as a self-employed borrower. The true “no document” loan further limits documentation by not requiring verification of employment. Many of the loan types on this page can include limited document features. No Doc loans are at a higher interest rate than regular loans.

Rate and Term Refinance Loans

These loans meant to allow a person to roll the loan balance on one or more existing loans on a property into a new loan, usually to lower interest rate. The closing costs associated with the new loan often can be paid by the lender or can be rolled into the new loan, resulting in a somewhat higher loan balance.

Cash-out Refinance Loans

These loans allow the borrower to refinance existing mortgages on a home and take out equity in the form of cash for other purposes. Most of these loans are available up to 80% of the property’s appraised value, but FHA loans can go to 85%. In addition, there are new guidelines for highly qualified borrowers that will permit a 90% loan to value ratio on some conventional loans. Plus, there are non-conforming loans that permit a high loan to value ratio also.