FHA Loan Types
A fixed rate mortgage (FRM) is a mortgage loan first developed by the Federal Housing Administration (FHA) where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float." Other forms of mortgage loan include interest only mortgage, graduated payment mortgage, variable rate (including adjustable rate mortgages and tracker mortgages), negative amortization mortgage, and balloon payment mortgage. Please note that each of the loan types above except for a straight adjustable rate mortgage can have a period of the loan for which a fixed rate may apply. A Balloon Payment mortgage, for example, can have a fixed rate for the term of the loan followed by the ending balloon payment. Loans for which the rate is fixed for less than the life of the loan may be called hybrid adjustable rate mortgages.
The payment amount is independent of the additional costs on a home sometimes handled in escrow, such as property taxes and property insurance. Consequently, payments made by the borrower may change over time with the changing escrow amount, but the payments handling the principal and interest on the loan will remain the same.
Fixed rate mortgages are characterized by their interest rate (including compounding frequency, amount of loan, and term of the mortgage). With these three values, the calculation of the monthly payment can then be done.
Fixed rate mortgages are often referred to as "plain vanilla" mortgage products for their ease of comprehension among borrowers, lacking many of the dangerous features that can come about vis-a-vis ARMs or floating-rate mortgages with fixed "teaser rates."
Adjustable Rate (ARM)
A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market of index they can choose to increase or decrease at their discretion. The term "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government, with limitations on charges ("caps”).
Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). This is not to be confused with the graduated payment mortgage, which offers changing payment amounts but a fixed interest rate. Other forms of mortgage loan include the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and the balloon payment mortgage.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls but loses if the interest rate increases. The borrower benefits from reduced margins to the underlying cost of borrowing compared to fixed or capped rate mortgages.
The 203(k) loan program offers borrowers the resources to rehabilitate a home that may be in need of repair, either the home that they currently live in, or that special fixer-upper opportunity. One single loan is used to pay for the purchase (or refinance) and the cost of renovating the home.
Made available to certain lenders by the U.S. Department of Housing and Urban Development (HUD), the FHA 203(k) program has already provided many buyers with the funds necessary to buy their first home, or greatly improve a current home. The FHA 203(k) loan is available to borrowers of all income levels, to homeowners who plan to occupy the house, and for homes with one to four units.
Veteran's Administration (VA)
A VA loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA). The loan may be issued by qualified lenders.
The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities.
The VA loan allows veterans 103.15% financing without private mortgage insurance or a 20% second mortgage and up to $6,000 for energy efficient improvements. A VA funding fee of 0 to 3.15% of the loan amount is paid to the VA; this fee may also be financed. In a purchase, veterans may borrow up to 103.15% of the sales price or reasonable value of the home, whichever is less. Since there is no monthly PMI, more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment. In a refinance, where a new VA loan is created, veterans may borrow up to 90% of reasonable value, where allowed by state laws. In a refinance where the loan is a VA loan refinancing to VA loan (IRRL Refinance), the veteran may borrow up to 100.5% of the total loan amount. The additional .5% is the funding fee for a VA Interest Rate Reduction Refinance.
VA loans allow veterans to qualify for loans amounts larger than traditional Fannie Mae / conforming loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills.
The maximum VA loan guarantee varies by county. As of 1 January 2011, the maximum VA loan amount with no down payment is usually $417,000, although this amount may rise to as much as $1,094,625 in certain specified "high-cost counties". VA also allows the seller to pay all of the veteran's closing costs as long as the costs do not exceed 6% of the sales price of the home.
A conventional mortgage is a loan that is not guaranteed or insured by any government agency. It is typically fixed in its terms and rate.
Government agencies such as the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA) can insure or guarantee loans. The FHA is a part of the Department of Housing and Urban Development and insures residential mortgage loans made by private lenders. The FmHA provides financing to farmers and other qualified borrowers who may have trouble getting loans. VA loans are for veterans or members of the military and can have a lower down payment.
Mortgages not guaranteed or insured by these agencies are known as conventional mortgages. These mortgages adhere to Fannie Mae guidelines. Fannie Mae, or Federal National Mortgage Association, is a corporation created by the federal government that buys and sells conventional mortgages. It sets the maximum loan amount and requirements for borrowers.
Usually, a conventional mortgage is a 30-year fixed rate loan. That means it has a fixed interest rate for the 30 year term of the mortgage. Conventional mortgages also typically require at least a 20% down payment. For example, if a house costs $200,000, the lender will provide a loan for 80% of that amount. So, $160,000 is financed through the lender and the borrower must pay $40,000 cash.
Conventional mortgages can have better interest rates than non-conventional mortgages and can be a great option for those with the 20% down payment. However, even if the borrower does not have a 20% down payment, it is still possible to get a mortgage. By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional mortgage.
A jumbo loan, by definition, is a mortgage with a total amount that exceeds conforming loan limits set by lenders. Conforming loan limits are traditionally established by agencies like Fannie Mae and Freddie Mac that buy mortgages on the secondary market.
In today's economy, with many properties already exceeding the conforming limits, homeowners are turning to jumbo loan refinancing to boost buying power or retire mortgages that no longer suit their goals. The relatively high risk of defaults associated with jumbo loan refinancing means that lenders will probably charge higher interest rates.
The 2006 limits set for conforming loan amounts set by Fannie Mae and Freddie Mac are $417,000 for a single-family home, $533,850 for double-family homes, $645,300 for three-family homes, and $801,950 for four-family homes. Conforming limits are twice the above levels for homes in high-priced housing states and territories, including Alaska, Hawaii, the Virgin Islands, and Guam.
Closing costs for jumbo loan refinancing packages also can be comparatively high.
Down Payment Assistance
There are many types of Down Payment Assistance available to borrowers who meet the eligibility criteria of the program(s) offered by many different organizations. RMS’ loan representatives can assist you in getting information on assistance programs.
We offer links to the HUD (Housing and Urban Development) website for the states we are licensed in. If you would like information on a state not listed on our website, please visit the main HUD website found at http://www.hud.gov/buying/localbuying.cfm.