Financing Options Cheat Sheet

There are so many financing options to choose from how do you keep them all straight? Where do you start? 

A good place to start is to understand the landscape and some of the basic options. Then you want to ensure that you talk to a financing expert about options that might be best for you. 

Here is a quick guide to the most common financing options. Of course, companies are always looking for new solutions to offer customers so this list grows.

GOVERNMENT LOANS
Restrictions may not make these a viable option for everyone. However, the low down payments, fees or interest rates may make them attractive to some who qualify.

• Federal Housing Administration Loans (FHA) - FHA loans are backed by the government providing low down payments for buyers. This can sometimes be a great option for first time home buyers in particular. There are even some special programs for public servants such as teachers, law enforcement officers, firefighters, emergency medical technicians, etc. These loans, do however, require you to play mortgage insurance, which contributes to higher monthly payments.
• Veterans Administration Home Loans (VA) - VA loans are available to veterans, active service members and surviving family members. The Veterans Administration guarantees a portion of the loan, which helps lenders provide benefits to the borrowers of these loans. Low down payments are one of the attractive benefits. There can be, however, stringent property requirements to qualify for a VA loan.
• United States Department of Agriculture Home Loan Programs (USDA) - The USDA program is in place to help low income families afford safe and clean housing through payment assistance. Typically, these come with no down payment and interest rates may run as low as 1%. Qualifying is dependent on income levels, home size (typically less than 2,000 sq. ft.) and location (rural area). 

CONVENTIONAL LOANS
Conventional loans are not government backed and include Fannie Mae and Freddie Mac mortgages. Conventional loans offer greater flexibility in qualifications and property selection as well as loan structure, but will often come with higher down payment requirements. There are four main factors considered when exploring conventional loan options: (1) Debt-to-Income Ratio, (2) Desired Down Payment, (3) Credit Score and (4) Prospective Properties. If you hear of conforming versus non-conforming loans, this is referring to whether the loan must conform to underwriting standards set by Fannie Mae or Freddie Mac.

• Fixed rate: With a fixed rate loan, your interest rate is determined in advance and remains locked in throughout the life of the loan. Part of the monthly payment goes towards reducing the principal amount of the loan amount and part goes towards the accrued interest. At the start of the loan a greater proportion goes towards interest.
• Variable/Adjustable rate: This is where an initial interest rate is specified for a fixed period of time and then reevaluated and adjusted  at set review intervals during the life of the loan. The interest can go up or down at these review intervals depending on financing conditions. For example, there are 5-year ARMS, 7-year arms, etc. These are attractive to some borrowers because they offer lower up front interest rate than fixed rate. Additionally, if someone is planning to own the home for a shorter period of time, this may be an option they consider.
• Jumbo loan: A jumbo loan is a non-conforming loan as it exceeds the loan limits established by Fannie Mae and Freddie Mac, which is viewed as higher risk for the lender. Because of this, there are more stringent requirements on credit and often larger down payment requirements.