Question

Discuss the different residential mortgage types and their unique advantages and disadvantages (conventional conforming, jumbo, FHA, VA loans).

Answer 1

a)Conventional Conforming

A conventional conforming loan is conventional mortgage whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddic Mac,government agencies that back most U.S. mortgages.

Advantages of  Conventional Conforming Loan are:

i)Low interest rates.

ii)Down payment can as low as 3%

iii)Lenders also work prefer conventional conforming loan as they can be easily packaged into investment bundles and sold in the secondary mortgage market.

Disadvantages of  Conventional Conforming Loan are:

i)Significant documentation required

ii)Lower debt to income ratio is required (approx 45 to 50%)

iii)Conventional loan are ideal for borrower with strong credit,a stable income and employement history.

b)Jumbo Mortgages

A Jumbo mortgages is a type of financing that exceeds the limits set by the Federal Housing Finance Agency and cannot be purchased,guaranteed or securityzed by Fannie Mae or Freddic Mac.It is a conventional loan that have non conforming limits.

Advantages of  Jumbo Mortgages are:

i)Interest rate tend to be competitive with other conventional loans.

ii)One can borrow more money to buy a home in expensive area.

Disadvantages of  Jumbo Mortgages are

i)Down payment of atleast 10 to 20% is needed

ii)Debt to income ratio should not exceed 45%

c)FHA Loans

An FHA loan is government backed loan insured by the Federal housing Administration(FHA).These loans help the make homeownership possible for borrowers who do not have a large down payment saved and do not have pristine credit.

Advantages of  FHA Loans are:

i)Credit requirement are more relaxed.

ii)No requirement of large down payment.

Disadvantages of  FHA Loans are

i)Overall higher borrowing cost.

ii)Required payment of mortgage insurance premium.

d) VA loans

These loans make it easier for veteran of the U.S. armed forces and sometimes their spouses,to buy homes.They don't require a down payment and are guaranteed by the Department of Veteran Affairs(VA)

Advantages of  VA Loans are:

i)Lower average interest rate than other loan types.

ii)No prepayment penalties.

Disdvantages of  VA Loans are:

i)It cannot be used to purchase vacation homes or investment property.

ii)A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program's cost to taxpayer.This fee as well as other closing costs,can be rolled into most VA loans or paid upfront at closing.