Choosing the Best Loan Program
Loan programs come in many forms and from many sources. Just as the loan structure can affect your interest rate and monthly payments, the source of funding for your loan can also affect your rate and payments. The source of funding can also affect your down payment and closing costs.
If you have at least 3% of the loan amount for a down payment, you may consider the most common type of loan, a conventional loan. These loans consist of conforming loans, which are secured by government sponsored entities (GSE) such as Fannie Mae and Freddie Mac, and jumbo loans, which are funded by private investors for loan amounts higher than the limits set by the GSE's.
Conforming loans are funded by Fannie Mae (FNMA) and Freddie Mac (FHLMC). These companies do not lend money directly to you, but work with lenders across the country to offer mortgage loans to meet your needs. As a secondary market for mortgage loans, they purchase mortgages from lenders and package them into securities that can be sold to investors.
If you are looking for a large loan amount to purchase or refinance your home, you could consider a jumbo loan, which has a higher loan amount limit than the limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
The federal government and other state, local and private entities have developed programs to help you purchase a home with a low down payment. If you are a first time homebuyer or have low to moderate income, you may be eligible for a mortgage insured by the Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA). While FHA does not make or buy loans, it insures FHA loans so that if you default on the loan, the lender will get reimbursed. You may be able to get an FHA loan with a low down payment of only 3% of the loan amount or less. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.
If you are a veteran or qualify by military service or other entitlements, FHA mortgage insurance can also be combined with a guarantee from the Veteran's Administration. VA mortgages were created to help veterans achieve the American dream and buy their own homes. VA loans offer low to no down payments with many of the same benefits as an FHA loan.
If you have bad credit, you may not qualify for a conventional loan. In this case, you could consider a subprime loan. Like other loans, subprime loans come in many forms based on the terms, loan amount and loan to value ratio you are looking for. In addition companies will look at your credit and give you a credit grade, which will help them determine the best loan for your situation. With less than perfect credit, you can expect to pay higher interest rates because of the higher risk associated with making a loan to someone with a poor credit history.