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CONVENTIONAL LOAN – A Conventional Loan is a mortgage which is not sponsored by any government entity, such as an FHA or VA loan. Many conventional loans are considered ‘conforming’ loans as they conform to the industry wide standards set by Fannie Mae and Freddie Mac, the two largest Government Sponsored Enterprises (GSE’s). These GSE’s buy mortgages from lenders in pools and sell them on the secondary market to investors, thus setting and requiring certain uniform underwriting standards. Conventional loans offer down payments as low as 3 to 5%, and only require monthly mortgage insurance for loans which carry a greater loan to value ratio than 80%. Conventional loans have set loan limits for conforming loan amounts and allow for increased loan limit adjustments for certain counties. These loans make up a majority of the US residential home loan market and are most suitable for borrowers with good to excellent credit.
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JUMBO – A Jumbo Mortgage is a residential home loan which surpasses the conventional, conforming high balance loan limits. As such, these loans do not qualify to be purchased by any of the GSE’s or any government loan programs. Guidelines for Jumbo loans are generally similar to conventional guidelines with a more strict overlay. Loan amounts for these loans reach into the millions while still providing interest rates which are competitive to conventional loans. Jumbo’s are becoming more and more popular as the housing market continues to gain ground in terms of value and price.
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ALTERNATIVE / NON QM – Alternative or Non Qualified Mortgage loans are an alternative financing method for residential properties which are geared towards borrowers who do not meet traditional financing guidelines. Many self-employed borrowers whose tax returns show substantial un-reimbursed expenses or whose bank statement cash flow is significant may be prime candidates for an Alternative loan. Buyers who have more recent bankruptcies or foreclosures may also find these loans suitable. While the loan guidelines may be more lenient on an Alternative loan, loan to value ratios may be slightly limited, and interest rates for these products will likely be higher than the conventional or government option.
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Debt Service Coverage Ratio (DSCR) – A DSCR loan is for investment properties only. It is a type of real estate financing that assesses the borrower’s ability to repay the loan based on the income generated by the property, rather than personal income. The DSCR loan ratio calculated by dividing the property’s net operating income (NOI) by its total debt service (loan payments). For example, a DSCR of 1.25 means that the property generates 25% more income than the amount needed to cover its debt obligations. DSCR loans are commonly used for investment properties, including residential or commercial real estate, because they allow investors to qualify based on the property’s cash flow rather than traditional income verification. This makes them ideal for borrowers who may not have consistent W-2 income but have solid rental income streams. These loans typically require a minimum DSCR of 1.0, but lower DSCR ratios are allowed for properties with higher equity. This type of loan simplifies the loan process for real estate investors and opens the door to financing options that may not be available with conventional loans based on personal income.
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FHA LOAN – An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA), which is a branch of the US Housing and Urban Development (HUD). FHA loans offer greater flexibility in their qualifying criteria versus conventional loans and thus, are excellent financing options for first time homebuyer’s and those with challenged credit. FHA accepts down payments as low as 3.5% and fico scores as low as 580, sometimes lower. Although rates may be quite competitive for FHA loans, monthly mortgage insurance and an up front mortgage insurance premiums are typically required. Closing costs for an FHA loan may often times be covered by the seller, or the lender, which make these loans all the more attractive options for the appropriate borrower.
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VA LOAN – VA Loans are residential home loans which are guaranteed by the US Department of Veterans Affairs and are made available to military veterans, current military members, reservists, and surviving spouses who remain unmarried. The VA sets specific minimum guidelines for these loans which are then made by private lenders. Some of the benefits of a VA loan are no down payment(100% financing), relaxed qualifying guidelines, no monthly mortgage insurance, and the guarantee provided by the USDVA. An up front funding fee for VA loans is however required, but this may be fully financed and in some cases may be fully waived. An applicant for this type of loan should attain their Certificate of Eligibility prior to applying.
