In buying a home, finding the right mortgage loan is an important step. Lenders offer various loan products to match their clients’ preferences and financial profiles. You need to understand the options available and decide which one best suits your situation and long-term prospects. The most popular types of mortgages are Conventional loans ( also known as Fannie Mae {FNMA} and/or Freddie Mac {FHLMC}) and FHA loans. Borrowers who have difficulty in obtaining a Conventional or FHA loan often resort to portfolio loans.
What are conventional loans?
Conventional loans are considered “plain vanilla” mortgages because they follow strict guidelines in terms of credit scores, debt-to-income ratio, and minimum down payment.
Conventional loans are purchased by the GSEs (government sponsored enterprises), Fannie Mae and Freddie Mac, which, in turn, sell bonds backed by packaged home loans to investors. This setup provides lenders with the money to finance loans.
Conventional loans are either conforming or non-conforming. Conforming refers to loans that adhere to the guidelines given by the GSEs, including minimum credit score requirements and loan limits.
Non-conforming loans may deviate from these guidelines. An example would be jumbo loans, which exceed the conforming loan limits set by the GSEs.
What are FHA loans?
FHA (Federal Housing Authority) loans are mortgages that are insured by the federal government, allowing lenders to make home loans available to more consumers. FHA loans have their own set of eligibility requirements, and require borrowers to pay mortgage insurance premiums.
What are portfolio loans?
Portfolio loans are mortgages that are not sold by the lender to the government and instead are kept in the lender’s portfolio. Portfolio lenders are typically privately owned community banks and have sole discretion on determining eligibility and the terms for a loan. They may grant a loan to a borrower with a low credit score or a high debt-to-income ratio, but at a higher interest rate.
Conventional vs. FHA vs. Portfolio loans
Here’s a comparative look at the benefits and drawbacks of these loan types.
- Down payment– Conventional loans typically come with a minimum down payment of 20%, while FHA loans may be obtained with as low as 3.5% down payment. The down payment requirement for a portfolio loan varies from case to case. Occasionally, the lender may not require a down payment at all.
- Loan limits– Conventional conforming loans have a higher loan limit compared to FHA loans. Check out the Fannie Mae, Freddie Mac and HUD websites for current loan limits. Portfolio loans have may have loan limits as determined by the lender in question.
- Interest rate– Interest rates for Conventional and FHA loans are determined by such factors as credit scores, loan duration, down payment and others. Generally, FHA loans have lower interest rates than conventional loans. Portfolio loans typically come with interest rates based on both Conventional and FHA loans.
- Mortgage insurance– Generally, a mortgage insurance premium is required in conventional loans only in cases where the down payment is less than 20%. All FHA loans, on the other hand, are subject to mortgage insurance premiums, first at closing and then annually. Portfolio loans are not necessarily subject to mortgage insurance premiums, it will depend on the lender’s requirements.
- Eligibility– Borrowers with low credit scores or high debt-to-income ratios are more likely to be eligible for an FHA loan than a conventional loan. However, not all lenders offer FHA loans. Additionally, some condos are not eligible for FHA financing. Portfolio loans may be granted to distressed borrowers at the lender’s discretion, but may not be available when market conditions are unstable.
Need a lender who will navigate these loans to get you the best terms? Call/text me at 760 622 5087 or e-mail me at [email protected]
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