Types of Loans

Command Home Mortgage offers all types of mortgages listed below. There are basically three mortgage-loan categories: government, conventional, and non-conventional. The information given here for each loan category is limited to general information. Listing all the details about each of these loan types and all their requirements would be prohibitive due to their length and the fact that the requirements can and do change frequently.

We would be happy to give you more information about how one or more of these loan types fit your specific situation, click here to contact us!

Government Loans

FHA Loans

FHA stands for Federal Housing Administration and is under the Department of Housing and Urban Development (HUD) of the federal government. It began operation in 1934 to help people during the Great Depression. FHA loans are insured by the federal government, thereby protecting lenders against loan default.

If you are not a U.S. military veteran or on active duty, or you do not wish to live in a rural area, FHA loans require the least amount of down payment—presently set at 3.5% of the real estate purchase price. FHA loans have the most lenient home-buyer qualifications, but have the highest mortgage insurance—insurance paid by the borrower to protect FHA and the lender in case of default. FHA loans usually have a lower interest rate compared to conventional loans.

Some other benefits allowed by FHA that can make home buying easier are:

  • All or part of the down payment can come in the form of a gift from relatives, close friends, or an employer.
  • If you cannot qualify for a home on your own, a non-occupant co-borrower (someone who would co-own the property but not occupy it) can be used. This simply means you can have a co-borrower that can help you get a start on home ownership.
  • FHA allows the purchase of one- to four-unit properties, as long as the borrower lives on the property. You can use 75% of the rental income for loan-qualification purposes.
  • FHA loans, as well as all government-backed loans, are assumable. This means when you go to sell your home, the qualified buyer can assume your FHA loan. This can make your home easier to sell, especially if the interest rate on your loan is lower than the market rate when you go to sell.
  • FHA loans allow the seller of the property you buy to give you up to a 6% (of the purchase price) concession to cover your closing costs and to begin your escrow accounts for property taxes and home insurance (called prepaid items). This seller concession is voluntary and must be negotiated with the seller at the time of writing the purchase contract.
  • You can also buy and improve a home (one or two unit) or improve your present home with a FHA loan, called a FHA 203(k) loan.

VA Loans

VA stands for Veterans Affairs. VA loans began in 1944 and were part of the GI Bill of Rights. The GI Bill was intended to help the veterans returning from World War II, and has continued to help veterans to the present day. You must get a Certificate of Eligibility issued by the VA; this can be done online. You’ll need a copy of your DD-214 Form if you are not on active duty.

  • VA loans require no down payment. A VA loan has upfront mortgage insurance—called a guarantee fee—which is currently 2.15% of the loan amount (if you are militarily disabled there is no fee), and can be included in the mortgage loan amount.
  • VA loans require no annual mortgage insurance, which makes the VA loan the best loan you can get.

Other things allowed by VA that can make home buying easier are:

  • VA loans are assumable (see FHA loans).
  • VA loans allow for a seller concession up to 6% of the sales price (see FHA loans).
  • Allows the purchase of 1 to 4 unit properties.

USDA Rural Home Loan

A USDA loan is a government-insured loan administered by the U.S. Department of Agriculture. USDA loans are available when the purchased property is in a rural area or in a city/town with a population of 10,000 or less, however there are exceptions.

A USDA loan requires no down payment. The USDA loan has two kinds of mortgage insurance:

  1. There is the guarantee fee, which is presently 2.00% of the loan amount. This fee is paid up front in a lump sum, but can be included in the mortgage and not paid out of your pocket.
  2. The other mortgage insurance is the annual mortgage insurance. This is a percentage of your mortgage balance spread over one year and divided by 12, because it is charged monthly (included in your monthly mortgage payment). Presently this is set at 0.50%. The actual dollar amount paid is reduced each year because the loan balance is reduced each year.

A USDA loan has borrower income limits; these limits are quite generous and depend on your household size and the county in which the property is located. There are also purchase price limits, which again are quite generous and determined by the county in which the property is located.

With no down payment required, this loan remains the best loan available for persons without a down payment who want to live in a rural area or smaller town and who do not qualify for a VA loan.

Conventional Loans

Conventional loans, sometimes called conforming loans, are loans that follow the rules and guidelines issued by Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corporation). Fannie Mae and Freddie Mac are government-supported enterprises (GSE). These GSEs buy the conventional loans from the lenders, thereby freeing up the lenders’ money to make more loans.

  • Conventional loans presently require a minimum of 3% down, and require a 20% downpayment in order to escape annual mortgage insurance (MI) payments; the lower the downpayment, the higher the cost of the MI.
  • Conventional loans generally have higher qualifying standards and slightly higher interest rates than government loans.  They, however, have lower annual mortgage insurance (MI) premiums than FHA loans and require no upfront mortgage guarantee fee as government loans do.
  • The loan limit for single family conventional loans presently (2015) is $424,500 for most areas of the USA. However, the loan limit can go higher in high-cost areas; these limits are set by county.
  • Conventional loans are not assumable as government loan are (see FHA loans) and allow for up to 3% in seller concessions to cover the buyer’s closing costs and prepaid items, which are escrows for the property taxes and the home insurance.

Home Renovation, Remodeling, Fixer-Upper Loans

These are loans designed to allow someone to renovate, remodel or fix-up their present home, or to purchase a new home and do the same.  For people who like their present home and location, but would like to make changes, either relatively small changes or relatively large ones, this type of loan is a very good way to afford to do so.  This type of loan also enables someone to purchase a home and include the money to fix it up. Sometimes, after the property is improved, it is worth more than the purchase price plus the money to make the improvements, which is always very nice; can be used for investment properties as well as primary residences. These improvement loans can be either government, conventional, or jumbo, whichever fits the situation the best.

Non-Conventional Loans

Non-conventional loans, also referred to as non-conforming loans, follow the rules and guidelines of the mortgage investor that lends the money. These loans are not sold off as is the case with conventional loans (see conventional loans above), but are usually kept in the investor’s own loan portfolio, therefore they are called a portfolio loans. These type loans come with a variety of different rules and guidelines, depending on the investor. Some non-conventional loans require just a stated income (no income verification), others accept low credit scores or no credit scores. Non-conventional loans typically require higher down payments from the borrower and come with higher interest rates; mortgage insurance is usually not required.

Jumbo Loans

Jumbo loans fall into the category of non-conforming loans. Usually the minimum loan amount for a jumbo loan begins at the maximum limit for conforming loans. As mentioned above in conventional loans, the present loan limit is $424,500 with exceptions for high-cost areas. In most cases, jumbo loans begin at over $424,500, and depending on the lender, go as high as $2-$5 million and sometimes higher. Jumbo loans usually require more down payment than conventional or government loans, and have higher interest rates, but require no mortgage insurance. Sometimes, rather than one jumbo loan, a borrower may use a conventional or government loan as a first mortgage and combine it with a second mortgage or home equity line of credit (HELOC) loan. If the interest rates for the first and second mortgages/HELOC combined are low enough versus the jumbo loan, the monthly mortgage payment can be lower than a jumbo loan.

Adjustable Rate Mortgage (ARM)

Adjustable rate mortgages (ARMs) permit borrowers to purchase or refinance a home with a lower initial interest rate than a fixed-rate mortgage, thereby lowering monthly payments for a certain amount of time; after such time, the interest rate can rise or fall depending upon the then current interest rate market. ARMs are used in conventional, non-conventional and FHA loans at the present time.

In the past few years, ARMs have not been nearly as popular as previously because of the interest rate market. In previous years (before the Great Recession) there would be a 1% or more interest rate difference between a 5-year ARM and a 30-year fixed rate mortgage, so the borrower’s monthly payment could be significantly lower, at least for the initial 5-year period. Presently however, there is usually no more than a ¼% to ½% difference in these rates, making not nearly the difference in the borrower’s monthly payment. Considering interest rates are at historic lows, artificially held down by the Federal Reserve to help stimulate economic growth, chances are interest rates will not decline much if at all in the future, but will almost certainly rise, making ARMs more expensive after the first adjustment period and beyond. Under present conditions, probably the only reason to use an ARM is if the borrower knows absolutely he/she will not be living in the home longer than the date on which the initial interest rate adjustment occurs, thereby enjoying a lower monthly payment without the risk of interest rate changes.

Here are the mechanics of an ARM:

  • ARMs usually come with initial fixed-rate periods of 3 years, 5 years, and 7 years, meaning the initial interest rate cannot change during these periods. 1 year and 10 year ARMs are sometimes available.
  • ARMs carry what are called caps—limitations on both time and interest rate. After the initial fixed-rate period has expired (3 yrs, 5 yrs, 7 yrs, etc.), there is a cap on how often the interest rate can change, there is a cap on how much the interest rate can rise each time it is changed and there is a cap on how much the interest rate can rise over the life of the loan.
  • ARMs can be expressed, 5/1/1/5, meaning it is a 5 year fixed-rate ARM, the interest rate can change once a year, the interest rate can change no more than 1.00% per year, and the interest rate can never exceed 5.00% higher than the original start rate.
  • ARM interest rates are attached to an index. This index is usually a well known index that can be seen daily in the Wall Street Journal or on the internet. An ARM will usually use the MTA (12-month U.S. Treasury Average Index), or the LIBOR (London Interbank Offered Rate), or COFI (Cost of Funds Index) as its index.
  • ARM interest rates are also attached to a margin. This margin is an interest rate the lender charges on top of the index rate. When the ARM interest rate is adjusted, the new interest rate becomes the combination of the index and the margin. For example, if the LIBOR is 1.50% and the margin is 2.25%, then the interest rate would be 3.75% (1.50 + 2.25). The margin will always remain constant; it is the index that can fluctuate.

Home Equity Line of Credit (HELOC) Loan

A home equity line of credit loan is a revolving credit loan using your home as collateral. Revolving credit means the borrower initially has a maximum amount they can borrow and as they pay down the loan (increase their equity), the borrower can go back and borrow that equity again. It’s just like a credit card: you have a maximum limit on your credit card; as you make purchases, you have less money with which to make more purchases. As you pay down your credit balance, you have more money with which to make future purchases.

HELOC loans are variable-rate loans, meaning their interest rates can change during the life of the loan. The interest rate is usually determined by adding the prime rate (as of March 2015 this is 3.25% and is variable) to a fixed-margin rate, which is assigned by the lender, and is determined by factors such as borrower’s credit score, debt-to-income ratio, and total debt to property’s value (loan to value). HELOC loans usually have two time periods within them. The first time period is called the draw period, this is the period of time when the borrower can use the revolving credit portion of the loan; there will be a minimum monthly payment (just like on a credit card), usually a percentage of the outstanding balance; and of course, any amount above the minimum payment may be made. The second time period is called the repayment period; this is the period of time in which the revolving credit portion stops, and repayment of the loan must begin. For example, a HELOC might have a 15-year draw period and a 10-year repayment period.

An alternative to a HELOC is a second mortgage. A second mortgage is a fixed-rate mortgage for a specific length of time, with equal monthly payments. There are advantages to both,