Residential home loan programs fall under two buckets: qualified mortgages and non-qualified mortgages (non-QM). This article is mostly about the “normal” mortgages (i.e. qualified mortgages), but it does outline some non-qualified loan programs as well.
Qualified mortgages are “normal” homes loans and they divide into two buckets: government loans and non-government loans. In contrast, non-qualified mortgages are lessor known and have fewer program options.
Mortgage Loan Programs Overview
The term “qualified mortgage” may not be mainstream but the loan programs that are under its umbrella are commonplace. All in all, most well known home loan programs are qualified mortgages. As can be seen below, the list qualified mortgages consists of very recognizable loan programs.
Conversely, non-qualified mortgages are home loan programs that don’t meet the guidelines for qualified mortgages. Examples of non-QM home loans are:
Non-Qualified Mortgages (Non-QM)
- Bank Statement Loans (for the self employed)
- Debt Service Cover Ratio (DSCR) Loans (no income loan, for investment properties)
- Hard Money Loans (for investment property)
At this point it’s important to note what this article does not cover. This article IS about loan programs on a broader level, but NOT about home loans done for a specific purpose. We are inventing the term “purchase programs” to define the difference.
For example, a Texas Home Equity A6 refinance loan is technically not a mortgage program. Rather, it’s a conforming home loan with the purpose of taking cash out of a home. The loan program is conforming, and the purpose is cash out.
Being that “purpose programs” is a term we made up, below are examples of what we consider purpose programs.
Examples of Purpose Programs
- Construction Loans
- FHA’s 203k Renovation Loan
- One-Time Close (OTC)
- Construction to Permanent (CTP)
There is a difference between a mortgage program and a mortgage feature. A mortgage feature can be applied to various loan programs.
For instance, a 2/1 temporary rate buydown is a mortgage feature. A buydown may be used when doing a conventional loan or a government mortgage.
Examples of Program Features
- Adjustable Rate Mortgages (ARMs)
- Extended Rate Lock
- Lock & Shop
- Temporary Rate Buydown (like a 2/1 buydown)
- Texas Vet Home Loan
It’s worth noting that the Texas Vet home loan feature is not exclusive to VA financing. A veteran getting a conforming loan can still apply the benefits of the Texas Vet program.
In conclusion, there are differences between a loan programs, loan purposes, and loan features. Given that each link above will provide more information about the respective feature, this article will not focus on mortgage features.
Qualified Mortgage Loan Programs
The designation of a qualified mortgage was born after the “mortgage meltdown” of 2007. Afterwards the federal government created guidelines for the loan programs in order to make them safe.
The purpose of the qualified-mortgage guidelines is to provide a framework for high-quality loans; thus, creating a stable lending environment and (hopefully) preventing future meltdowns.
Most “normal” mortgages fall under the qualified mortgage guidelines. Below is an outline of both government-back loan programs as well as non-government mortgages.
Government Loan Programs
Not surprisingly, government home loans are backed by the federal government. The three government departments that offer home loans are:
- Housing and Urban Development (HUD) for FHA home loans
- Veteran’s Administration (VA) for VA home loans,
- United States Department of Agriculture (USDA) for USDA home loans.
FHA loans are the widely avialable of the government loan programs. The reason is because VA loans are only for veterans of the military, while USDA loans have geographic and income restrictions.
With government-backed home loans, Uncle Sam is on the hook to make the lender whole should the loan result in a foreclosure. In exchange for this backing, government loans often have some form of upfront MIP (a.k.a. MI, MIP, PMI, Funding Fee, Guarantee Fee, etc.).
Advantages of Government Loan Programs
For the most part, government loans are designed to promote homeownership for everyone. In order to accomplish this, government-backed loan programs offer:
- minimal down payment requirements
- lower credit standards
- flexible underwriting guidelines
- potentially lower interest rates
As shown above, government loan programs allow for low down payments options. Both VA and USDA offer 100% financing; this means no down payment is required. By contrast, FHA’s minimum down payment is 3.5% of the sale price.
The purpose of the government-backed mortgage programs is to promote homeownership. One way they do this is by offering loans to individuals with lower credit scores. For example, FHA will allow credit scores as low as 580.
Government loans offer more flexible underwriting guidelines compared to other loan programs. Also, these loan programs can be underwritten manually. This means a human – not a machine – can approve a loan. This is a fantastic benefit when there is a story to tell because “life” happened.
The interest rates for these loan programs tend to be very reasonable – even when layers of risk exists. For example, when compared to conventional loans, the government loans have smaller interest rate adjustments for lower credit scores, thereby offering a lower rate by comparison.
FHA Home Loans
FHA home loans are not exclusive to first timer buyers; however, they are often dubbed as such. The FHA program is often used for lower credit scores and/or lower down payment options.
For the most part, there are three primary benefits for FHA loans. Firstly, the minimum down payment for FHA is 3.5%. Secondly, the minimum credit score is 580. Finally, seller concessions are 6% (which pays for closing costs).
FHA has maximum loans limits that vary by county. Visit the HUD website to look up the maximum FHA loan amount by county. The FHA loan limit for most of north Texas in 2022 is $450,800.
FHA Mortgage Insurance Premium
FHA’s mortgage insurance premium (MIP) is higher than conventional MI when credit scores are high; think 680 and higher. Conversely, FHA’s MIP is lower than conventional MI when the credit scores are lower.
The upfront MIP is 1.75%, and it is automatically rolled into the loan amount. The upfront MIP is mandatory, regardless of the down payment amount.
The annual MIP amount (which part of the monthly payment) is .85% of the loan amount when putting down 3.5%. When the down payment is 5% or more, the annual MI amount decreases to .80% of the loan amount.
The annual MIP is permanent if the down payment is less than 10%. Conversely, the MIP takes 11 years for the to drop off when putting down more than 10%.
Visit the FHA home loan page for further details.
Reverse mortgages fall under FHA. These loan programs are only available to individuals that are 62 years old or older.
Here are examples of how reverse mortgages can be structured:
- no monthly payments,
- lump sum payment amounts,
- lines of credit,
- or with monthly installments.
The highest LTV is around 50% so a client better have a ton of equity. The LTV is determined by the individual’s age. The older the individual, the more equity they can access.
Reserve Mortgages are often a “need based” loan programs. They can be relatively costly relative to the loan amount. The cost of the points charged can range from $2,500 to $6,000 on the loan size.
The upfront MIP is like FHA at 1.75%. Likewise, reserve mortgages require monthly MIP despite the lower loan to value (LTV).
In our opinion, reverse mortgages are a fit for a very small percentage of the population; however, they are great a loan program for those that truly need them.
Veteran Administration (VA)
VA home loans are for veterans of the U.S. military (or the surviving spouses of veterans). The biggest benefits of VA financing includes: zero down payment, no monthly MI, and flexible underwriting guidelines.
VA allows 100% financing. In addition, VA allows the seller to contribute up to 4% of seller concessions to help pay for the veteran’s closing costs. It is possible for veteran to buy a home and literally pay zero dollars at closing. This happens on a regular basis.
Another benefit to VA home loans is that they don’t have any monthly MI. The tradeoff is that VA does require an upfront funding fee. This is like FHA’s upfront MIP. The funding fee typically ranges from 1.5% to 3.3% of the loan amount, depending on the veterans usage and down payment.
A veteran with disability may be able to have the funding fee waived. Moreover, a disabled veteran may qualify for property tax deductions. The amount of the tax exemption varies by county and depends on the amount of the veteran’s disability.
VA Down Payment Required
VA home loans allow 100% financing; however, below are two instances when a veteran is required to make a down payment when buying a home.
The first scenario that requires a veteran to make a down payment is if there is a current VA loan at the time of the new VA closing. A down payment is required because the veteran has a portion of their entitlement tied up in the current VA loan.
A veteran can restore their full entitlement by paying off the current VA mortgage. The veteran can either sell the home, refinance to a non-VA loan, or pay off the loan with cash.
The second scenario that requires a veterans to make a down payment is if the sales price is above VA’s $1,500,000 loan limit.
In both cases the lender will use a VA entitlement worksheet to determine the down payment amount. The veteran’s Certificate of Eligibility (COE) document is needed to calculate the minimum down payment. The COE shows the amount of entitlement that is available to the veteran.
USDA Home Loans
USDA home loans offer 100% financing so that zero down payment is required. Unlike other loan programs, both the property and the buyer must meet certain qualifications beyond the normal mortgage loan process approval.
USDA Geographic & Income Restrictions
First, USDA home loans are for homes in rural areas. Therefore, the home must be located in an eligible area if the borrower wants a USDA loan. See USDA’s eligibility map for details.
Secondly, USDA loans have maximum income limits. This means that a borrower may not qualify for a USDA loan if the gross household income is too high. The 2022 maximum household income limit for most of north Texas is $112,000 per year.
This is USDA’s link to determine income eligibility. There is also a tab on that website that shows the “Income Limits” by county.
Characteristics of USDA Loans
Like other government loan programs, an upfront fee and monthly insurance premium is charged. USDA charges a guarantee fee of 1% at closing which can be rolled into the loan amount. The annual fee, which is part of the monthly payment, is .35% of the loan amount.
USDA allows the seller to contribute 6% seller concessions. USDA also allows for 2% of the closing cost to be rolled into the loan amount when the home’s appraised value is 2% higher than the sales price. These two options can enable a buyer to come to closing with zero dollars.
Conventional Loan Programs
Conventional loans are basically any loans that don’t fall under the government bucket.
The terms “conventional” and “conforming” are often incorrectly interchanged. As stated above, “conventional” means a non-government-backed loan. For example, jumbo loans are conventional loans.
Comparatively, the word “conforming” means it’s a conventional loan that meets Fannie Mae and Freddie Mac’s guidelines. This requires that the loan amount meet the conforming loan limit of $700,000 or less.
Conforming loans are conventional loans that meet Fannie Mae and Freddie Mac guidelines. In addition, conforming loans adhere to the conforming loan limits set by the FHFA. As such, the conforming loan limit for 2023 is $700,000.
Because much of this website’s content covers the details of conforming loans, the section below will provide links to various pages provide more information for specific topics.
Visit the mortgage down payments page for recommendations on how much to put down when buying a home and using conventional financing. The minimum down payment for conforming loans is 3%.
The amount of seller contributions depends on the down payment amount and the occupancy of the home. The chart below shows the seller concessions for a conforming loan.
Private mortgage insurance (PMI) is required when the loan to value (LTV) is greater than 80%. PMI rates are determined by a number of factors.
See the Private Mortgage Insurance (PMI) article for more details. Unlike government loan programs, a homeowner can cancel conventional PMI when the loan to value is low enough. Utilizing a second lien mortgage is another method to avoid paying mortgage insurance.
A jumbo home loan is a conventional mortgage where the loan amount is above the conforming loan limit. At this time, the conforming loan limit for 2023 is $700,000.
Most jumbo programs will require a 20% down payment. Although there are some programs that allow for 0% down on a jumbo loan (like the professional’s program for doctors and attorneys).
Jumbo interest rates are often about .125% to .375% higher than conforming interest rates. However, there are occasions when jumbo rates can be at parity or even lower than conforming rates. The market conditions determine this relationship.
Jumbo borrowers may also explore adjustable rate mortgages. For example, a 10/1 ARM is often chosen over a 30 year fixed rate loan because of the difference in rate (e.g. .375% to .5%).
A non-qualified mortgage (non-QM) is home loan that does not meet the requirements for a qualified mortgage. Non-QM loans do contain more risk for lenders; therefore, the financing terms aren’t as beneficial as those of qualified mortgages.
Non-QM mortgages generally require a 20% down payment. The interest rates are higher than the conventional counterpart.
The underwriting guidelines for these loan programs vary from lender to lender. Due to this, it is not feasible to outline all the different investor’s terms in this article. Therefore, please call us to discuss the specifics of program.
Bank Statement Loans
Bank statement programs are for self-employed individuals. The monthly bank deposits determine the qualifying income. As a result, the income is a product of revenue, not net income. A bank statement loan is especially helpful for a business owner with a bunch of tax write offs.
Bank statement loan programs use either 12 months, or 24 months, of bank statements for the qualifying income. The 24 month bank statement program will have a lower interest rate than the 12 month program. The reason is because lenders have more data (i.e. longer income history) so it reduces the risk.
Many non-QM loan programs will allow real estate investors to buy a home in the name of a business entity (e.g. LLC, partnership, corporation, etc.)
Contrary to traditional commercial loans, these non-QM loans will often have better terms. For example, these loan programs offer 30 year fixed rate options. Furthermore, a mortgage made to an entity (instead of an individual) will most likely have discount points charged at closing.
Debt Service Cover Ratio (DSCR)
Debt service cover ratios (DSCR) loans are mortgages for real estate investors. Unlike most mortgage programs, DSCR loans do not require income documents. To repeat, these DSCR mortgage programs do not require pay stubs, tax returns, W2s, P&L, etc..
The qualifying income for DSCR loans is the subject property’s potential rental income. This rental income must be greater than the future mortgage payment. Hence, the cash flow will “service” the debt.
DSCR mortgage can close in the name of a business entity (i.e. an LLC).
Hard Money Loans
Hard money loans can only be used on investment properties. The term “hard money” implies that the money is derived from a non-traditional lender (i.e. the money is coming from a private institution or an individual).
Above all, there are two primary reason why hard money loans are good alternatives for real estate investors: speed and ease.
First, hard money loans typically close quickly. For example, it’s possible to close a hard money loans within 24 hours. The average is about five business days. are that they are quick and
The second reason hard money loans are favorable for an investor is because underwriting is more focused on the property, not the individual. Hard money loans don’t require income documents. Instead, the focus is on the property’s sales price (relative to the market), the potential cash loans, and the future profit.
The terms of hard money loans can be expensive. Consequently, in exchange for the speed and ease, hard money loans often have 2 to 3 points charged at closing, and interest rates ranging from 10% to 16%.
Other Loan Programs
Portfolio programs and bond loans technically aren’t loan programs. A portfolio loans describes the origin of the loan. Bond programs can be closed using either conventional or FHA financing. Nonetheless, they are unique enough to include as a mortgage programs.
Portfolio Loan Programs
Financial institutions (like banks) originate portfolio loans that they intend to retain and own. Since portfolio lenders keeps the mortgage debt, they create the underwriting guidelines and allow for exceptions.
Portfolio mortgages offer alternative financing beyond the traditional loan programs. The primary reasons why “port” loans exists is because lenders want to fill a need, and can charge a premium for “common sense” loans that don’t qualify with conditional guidelines.
Portfolio mortgage programs often offer shorter-term fixed rates mortgages or adjustable rate mortgages (ARMs). It’s rare for portfolio programs to offer 30 year fixed rate mortgages given that portfolio lenders don’t want long-term risks.
With portfolio loans, the interest rates and the down payment requirements are typically more conservative than those of conventional loans. This means that the rates are higher and the down payments are larger.
Some portfolio programs do offer less than 20% down for special programs. For example, many investors offer a professional’s program with 100% financing for doctors and attorneys.
It’s worth noting that a mortgage servicer is different than the owner of a loan. The institution that owns the debt (i.e. the mortgage note) may not be the company that collects the monthly payments (i.e. the mortgage servicer).
Bond Loan Programs
There a ton of bond loans and down payment assistance programs. Many bond programs allow for 100% financing; others may require 3% to 5% down. First time buyers often use bond programs because of the low down payment requirements.
Most bond programs have restrictions. For example, bond loans may have income caps, geographic limitations, employment restrictions, or may be limited to first-time buyers. Bond loans, for the most part, are typically localized and purpose driven.
Bond loans are state specific. Each program has its own nuances that can be problematic if a lender isn’t intimately familiar with the guidelines. For that reason, the Mortgage Mark Team will only originate bond programs in Texas.
The three most popular Texas bond loan programs are:
- Texas Department of Housing & Community Affairs (TDHCA),
- Texas State Affordable Housing Corporation (TSAHC), and
- Southeast Texas Housing Finance Corporation (SETH).
These programs can be expensive with their mortgage insurance, mandatory points, and higher rates. However, the zero down payment may allow a individual to qualify for a home loan when they may not have otherwise been able to do so.
Please call us if you have any questions about these programs.
As shown above, there are a number of loan programs available when buying or refinancing a home. Please contact the Mortgage Mark Team if we can be of any service. We’re here to help.