There are seven major loan types that give potential homeowners the opportunity to enter the real estate market. Here are the basics about these loan types.
1. What is a conventional loan?
Any mortgage loan that is not underwritten or insured by a government agency is known as a conventional loan. Although some government agencies will give direct loans, certain agencies will also insure the loans that are made by private lenders. For instance, no loan that is backed or insured by the Federal Housing Administration (FHA), the United States Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA) can be a conventional loan.
2. What is a conforming loan?
A conforming loan must adhere to certain guidelines that are set by government agencies Freddie Mac and Fannie Mae. The main limitation of a conforming loan is the maximum that a borrower can take. The amount changes every so often with inflation, and it is higher in certain high income areas such as San Diego and New York City.
3. What is a non conforming loan?
A non conforming loan is the exact opposite of a conforming loan, meaning that it does not adhere with the standards that are set forth by Freddie Mac and Fannie Mae. There is no maximum limit on the amount that can be borrowed, meaning that a non conforming loan is usually necessary to buy a larger property.
A non conforming loan may also be referred to colloquially as a jumbo loan. Jumbo loans are harder for lenders to sell on the secondary market. As such, lenders increase the scrutiny that it places on borrowers in order to give borrowers a jumbo loan. Jumbo loans usually have higher interest rates and longer term periods than conventional loans and conforming loans, with 40 and even 50 year terms.
4. What is a secured loan?
A secured loan is a loan that leverages the personal property of an owner. In the instance of a default, the property transfers to the owner. For instance, a second mortgage can be referred to as a secured loan, because the loan is secured by the house itself. Savings accounts, cars, and investment art are additional forms of security that may be used to help underwrite a loan.
Secured loans usually reduce the risk profile of a borrower, resulting in a lower interest rate. Security assets can also be used alongside another type of loan to further reduce the risk to the lender. A person can also serve as a security: The guarantor serves the same purpose as a car or a house in reducing the risk profile of a lender.
5. What is an unsecured loan?
An unsecured loan is not backed or underwritten by any personal property of the lender. Because unsecured loans do not have any additional leverage from assets, lenders must consider the more traditional financial characteristics of a borrower such as credit history, bployment history, debt to value ratio, and cash on hand.
The unsecured borrower also needs a good credit score in order to get the best deals. There is no hard and fast standard minimum score that a borrower must have in order to receive a loan; the lender makes that choice based on the score as well as other factors such as credit history. However, borrowers will higher scores will get better deals. Borrowers with a score of 740 or higher are in the highest tier, and borrowers with scores above 700 have leverage. Scores below 600 usually require some attention before they will be advantageous to a financial portfolio.
6. What is an open ended loan?
An open ended loan can be used over and over again once it has been repaid. These loans have fixed limits on their credit. Home equity lines of credit (HELOC) are open ended loans that give borrowers credit based on the appraised value of a property. Although the HELOCÂ loan is a second mortgage, the borrower receives a special credit card that can be used just like a standard credit card. You can borrow from this account as you please, and if you pay it down to a zero balance, it does not automatically close.
7. What is a closed ended loan?
A closed ended loan is the exact opposite of an open ended loan: a loan that is paid off and closed completely. With each payment that a borrower gives to the lender, the balance on the loan is reduced, and when the balance is zero, the loan is closed. The traditional mortgage is a closed loan, and you must apply for a new line of credit once the balance is zero.
Each of these loan types is administered by a variety of private and government organizations, all with varying requirbents and terms. Make sure that you research the organizations as well as the loan types so that you can get the best deal for your next house.
2 Point Highlight
Because unsecured loans do not have any additional leverage from assets, lenders must consider the more traditional financial characteristics of a borrower such as credit history, bployment history, debt to value ratio, and cash on hand.
Although the HELOCÂ loan is a second mortgage, the borrower receives a special credit card that can be used just like a standard credit card.
