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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).
Click on a loan type below:
- Conventional Loans
- Conforming Loans
- Non-Conforming Loans
- Government Loans
- In-House or Portfolio Loans
- Commercial Loans
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.
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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