Type of

Loan

Description

Advantage

Fixed Rate Conventional Mortgage

A conventional loan is a loan made to a buyer without a third-party participant, such as VA or FHA.  Fixed rate conventional loans are usually paid off in equal monthly payments spread over 15, 25, or 30 years.  The interest rate stays the same for the life of the loan, therefore the monthly principal and interest payment remains constant.  Terms of a conventional loan vary among lenders, but most can be obtained with as little as 5% down payment.  When the down payment is below a certain percentage, it is necessary to obtain private mortgage insurance to protect the lender from a buyer’s default.

Easier processing and stable payments.

Adjustable Rate Mortgage (ARM)

With this loan, the interest rate may go up or down over the years and is tied to a financial market index.  Monthly payments may also be adjusted on a periodic schedule.  Many ARMs set a maximum adjustment (or “cap”) on possible increases to interest rates, monthly payments, and/or a maximum cap on rates for the life of the loan.

The lower initial interest rate and monthly payment allows the buyer to pay less in the early years for a larger loan.  Caps offer peace-of-mind rate ceilings.

FHA Loan

Strictly speaking, the Federal Housing Administration (FHA) does not make loans; rather, it insures loans, which increases lenders’ willingness to make low down payment loans.  With an FHA-insured loan, a homebuyer can make a small down payment, a feature particularly attractive to first-time buyers.  The down payment often averages in the range of 3-5% of the loan amount.  Second mortgages are now permitted.

Points can be charged by the lender, but since the FHA rate is not tied to the points, the purchaser may negotiate the interest rate and points with the seller.

FHA charges an advance mortgage insurance premium (MIP) fee.  Ask how much the fee would be in your situation and if you can borrow the fee and add it to the loan amount, rather than measurably increase your closing costs.

Low down payment; low interest rates; long terms; no prepayment penalty; second mortgage is permitted.

VA Loan

The Veteran’s Administration (VA) guarantees loans for qualified veterans up to a specific limit with no down payment, or up to a higher limit with some down payment.  These limits occasionally change; check with your lender for current rules.  VA-guaranteed loans can be combined with second mortgages.  Payments are fixed for the full term.  VA/FHA qualification guidelines are more flexible than those for conventional loans.  Actual income qualifications are dependent on the type of loan requested.

Usually no down payment and an interest rate typically below conventional loans; no prepayment penalty; assumption may make your home very attractive to buyers when you decide to sell.

JUMBO Loan

A jumbo loan is a conventional loan that is tailored for higher priced properties.  Fixed rate jumbo loans exceed the loan limit guidelines for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and, for that reason, also may be referred to as non-conforming loans.  Rates will be higher than for a conforming conventional loan.  Terms will vary with different lenders, but are usually available with a 20% down payment.  Some lenders allow a lower down payment, but will also require private mortgage insurance to be paid by the buyer in return for the lower down payment.

Financing for higher priced properties with stable payments.

VHDA Loan

The Virginia Housing Development Authority (VHDA) is a public mortgage finance agency that provides low-interest loans to first-time homebuyers.  Homebuyers must be U.S. citizens or lawful permanent resident aliens who are creditworthy and have not owned a property in which they have resided for the past three years.  There are maximum limits for the sales price of the house and for the gross income of the loan applicants.  Types of loans include FHA, VA, Rural Development, and 30-year conventional loans which require as little as 3% down payment.  There are other details that should be reviewed with a VHDA-approved lender.

Lower interest rates; many programs; ideal for first-time homebuyers.