Understanding
Loan Types
What Type of Loan Program is Best For You?
The subjects below explain the main loan categories that the many
loan programs fall under. These are major types of loans, not to be
confused with the individual loan programs themselves (such as Fixed
Rate Loans or Adjustable Rate Mortgages).
Conventional Loans:
Conventional loans are loans that are not insured or guaranteed
by a government agency (see FHA and VA for information on government
loans). They can be conforming or non-conforming loans. Most of
the conventional loans that have been made in the last several years
have three basic attributes in common: 1) They have been for long
terms, 2) They have been loans with fixed interest rates, and 3)
they have been fully amortized (see Fixed Rate Loans and Adjustable
Rate Loans.
Conforming Loans:
Conforming loans can be resold in the secondary market due to the
fact that they meet nationally accepted underwriting criteria established
by national secondary market investors, primarily Fannie Mae (FNMA)
and Freddie Mac (FHLMC). This criteria includes down payment amounts,
maximum loan amounts, property specifications, borrower income requirements
and credit guidelines. Due to the importance of being able to liquidate
real estate investments (loans) in the event of a financial problem,
the trend for lenders is to obtain loans that meet secondary market
standards.
The conforming loan limit in Iowa for a single family home is $257,700,
for two family homes - $307,000, for three family homes - $371,200,
and for four family homes - $461,350. For five or more residential
dwellings, see COMMERCIAL LOANS.
Non-Conforming Loans:
Non-conforming loans are loans that do not conform to the guidelines
set forth by Fannie Mae or Freddie Mac. Non-conforming loans consist
of Jumbo loans (exceeding the conforming loan limit), inadequate
credit history or derogatory credit, not enough income, home equity
or home improvement loans, credit lines, and second mortgages to
name a few.
Government Loans:
Government loans consist of loans that are in some way guaranteed
or purchased by government owned corporations or organizations.
For instance, GNMA (Government National Mortgage Association) assists
in the financing of urban renewal and housing projects by providing
below-market rates to low income families. GNMA guarantees the payment
of principal and interest on FHA and VA mortgages through its mortgage-backed
securities program. It operates under the Department of Housing
and Urban Development (HUD).
In-House or Portfolio Loans:
Portfolio loans are loans that banks or other lending institutions
may keep "in-house", or sell to the secondary market (FNMA
or FHLMC). The qualifying guidelines for these types of loans may
be more flexible than the requirements set forth by secondary market
investors.
Commercial Loans:
Commercial loans are generally made by commercial banks who normally
supply capital for business ventures and construction activities
on a comparatively short-term basis. Although in recent years, large
commercial banks have increased their participation in home mortgage
lending. They usually make loans on residential properties with
five or more units (apartment complexes), warehouses, office buildings,
etc.
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