A Lid for Every Pot!
Guest Post by Tim Britt
Last month I talked about Affordable mortgage programs. In an earlier article, I mused that there isn’t a “one-size-fits-all” mortgage program…and began a dialogue about three categories of mortgages: Affordable, Specialty, and Traditional. This month – we’ll tackle the Traditional Mortgage Programs and discuss their features and benefits, as well as the typical clientele for them.
Traditional Mortgages are loan programs that typically appeal to borrowers with established credit, with loans that offer both fixed and adjustable rates and terms.
The potential clients for Traditional Mortgages are those who can afford relatively larger down payments (> 5%) and have higher credit scores (FICO > 700). The overall benefits include allowing a borrower to choose from a variety of options, from short-term ARMs (Adjustable-Rate Mortgages) to 30-year fixed rates and just about anything in between. Interest rates and overall loan costs are often lower, (although not universally).
Traditional mortgages can be subdivided into 2 specific categories:
- Conforming Loans – which conform to Fannie Mae (FNMA) or Freddie Mac (FHLMC) lending guidelines.
- Non-Conforming Loans – which typically have loan amounts above the limits set forth by FNMA and FHLMC. These are also referred to as Jumbo
Conforming and Non-Conforming Loans fall under the Conventional loan classification…meaning that they are not backed by a government agency (as is the case with VA, FHA, and USDA Loans). The main difference, however, lies in how these loans are securitized. All Conforming Loans are securitized by either FNMA or FHLMC. This basically means that lenders who originate these loans are re-capitalized by these agencies so that they can continue to originate new loans to maintain a robust housing economy. The actual mortgages are bundled into Mortgage-Backed Securities (MBS) and used as investment instruments in the market. When you hear the phrase “my loan got sold;” the element that is actually sold is the servicing, or the collection of the payment, rather than the loan itself.
Non-Conforming loans, however, are typically referred to as Portfolio products. These loans are securitized by either the bank who originates them or a bank/investor who purchases them from the originator. While the lending guidelines may mirror those of Conforming Loans, these products do not fall under the auspices of FNMA or FHLMC.
As mentioned above, the differentiator between Conforming and Non-Conforming is the Loan Amount. Conforming loan amounts are established annually by the Federal Housing Finance Authority, and are adjusted geographically. Areas with higher cost-of-living indices and higher housing prices have higher Conforming Loan Limits.
When the Loan Amount exceeds that limit, the Non-Conforming/Jumbo Loan Product is the available avenue for financing a home purchase. I often refer to these as “boutique” loans, because there are many variations of them in the marketplace today, depending on the specific lender. Each lender or investor is able to establish their own Credit, Income, and Asset guidelines for these loans based on their particular business or risk-tolerance model, although as I mentioned, many of them mirror the FNMA or FHLMC guidelines.
So – where do you start?
While there certainly isn’t a single loan program that fits every need, there is usually one that will best fit your specific needs…or, “a lid for every pot!” If you feel like a Traditional Mortgage Program may best fit your needs – give me a call and I’ll be happy to sit down with you and discuss the features and benefits of each, and help you choose the one that may be best-suited for your particular situation.
Tim Britt is a Senior Mortgage Loan Officer (NMLS 1369718) with Fifth Third Bank in Franklin, TN. He can be reached at 615-415-8887 or [email protected]. The statements or opinions expressed are Tim’s own and do not necessarily represent those of Fifth Third Bank.