Insured, Guaranteed, and Conventional Loans
If you qualify, your loans may be insured by the Federal Housing Administration (FHA); if you've served in the United States Armed Forces, you may be eligible for a Department of Veteran's Affairs (VA) loan. However, the majority of mortgage loans that are made are conventional loans, loans that are not insured or guaranteed by any government agency. Lenders who make conventional loans must follow guidelines established by Fannie Mae and Freddie Mac in order to sell them on the secondary market.
Insured by the FHA
The FHA does not make loans — it insures lenders from loss if FHA guidelines are used to determine loan approval. The most common FHA loan program, known as Section 203(b), requires a very small down payment and is reserved for single-family, owner-occupied residences. Other FHA-insured loans that can be used by investors include the following:
Section 221(d)(4) insures up to 90 percent of loans to build rental housing for moderate-income families.
Section 223(f) insures loans for existing apartment buildings that are at least three years old.
Section 234 insures loans for the construction or rehabilitation of apartments that are being converted to condos.
A mortgage broker or loan officer is your best source of information about loans that can be issued for all types of properties.
FHA offers a loan program for owner-occupied duplex, triplex, and fourplex units. Live in one unit and let rent from the others make your payments. Many real-estate investors have started their careers using that method.
The VA guarantees a portion of each mortgage made through its program for qualified current and former member of the United States Armed Forces. The VA does not make loans, but it does guarantee a portion of each borrower's loan. VA loans are attractive because they can be processed with no money down. Closing costs cannot be financed, but the seller is allowed to pay them. VA loans are for owner-occupied residences only. Your lender can give you complete details about the VA loan-guarantee program, including specific armed service requirements.
Conventional Mortgage Loans
Conventional loans are divided into two categories: conforming and nonconforming. Conforming loans have the most rigid underwriting guidelines. They are less risky to the lender, so they carry low interest rates. Lenders look for borrowers with little debt and excellent credit histories. The traditional down payment is 20 percent, but you can opt for private mortgage insurance, PMI, to reduce the amount. You might choose to take a second loan to add to the down payment and avoid PMI. It's a good idea to discuss your payment options with your lender.
Nonconforming loans are variable from one lender to another. They are sometimes referred to as “subprime” loans because the majority of them are geared to applicants with negative credit histories. Guidelines are not as strict as those for conforming loans, but borrowers can expect to pay higher interest rates. Your lender will explain your options if you qualify for a nonconforming loan.