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Standard Residential Loan Programs
Conforming Loans adhere to the underwriting guidelines published by FNMA or FHLMC. These guidelines proscribe specific requirements for income and assets, thresholds for LTV, CLTV, DTI, and FICO Scores, as well as a host of other items that relate to the overall risk profile of the loan.
One of the most publicized guidelines is the maximum loan amount. Each year, the FHFA is responsible for reviewing and re-establishing the maximum loan amount (referred to as the “Conforming Loan Limit”). The Conforming Loan Limit for 2020 is $510,400.
Conforming Loans are eligible to be sold to FNMA or FHLMC and are viewed as a ‘benchmark risk’ by the secondary markets, where investors buy and sell bundles of mortgages and mortgage-backed securities. Because the guidelines are well known to investors, bundles of ‘conforming’ loans generally benefit from strong investor demand and are typically priced more efficiently than ‘non-conforming’ loans.
High Balance Loans adhere to all of the conforming guidelines published by FNMA or FHLMC, except that the loan amount is higher.
For certain counties designated as ‘High-Cost’ areas, the FHFA allows for an exception to the Conforming Loan Limit. This exception is intended to accommodate the need for higher loan amounts due to higher median home values. Commonly referred to as the “High Balance Loan Limit,” these higher loan limits, if available, vary from county to county. In most Denver metro area counties, the High Balance Loan Limit for 2020 is $575,000.
High Balance Loans are eligible to be sold to FNMA or FHLMC but are commonly viewed as somewhat riskier by secondary market investors (relative to Conforming Loans).
Jumbo Loans have a loan amount above the Conforming Loan Limit or the High Balance Loan Limit (as applicable).
While a larger loan amount may not necessarily seem like a bad thing, Jumbo Loans often have additional underwriting ‘overlays’ that are more restrictive than typical Conforming Loans. Higher down payment requirements, lower DTI thresholds, higher FICO limits, and more stringent income qualification rules are just some of the ways investors try to limit the incremental risk of Jumbo Loans.
Because Jumbo Loans are not eligible to be sold to FNMA or FHLMC, these loans are typically aggregated and securitized by banks / finance companies (in the form of Private-Label Mortgage Backed Securities) or held directly in bank portfolios.
FHA / VA / USDA
Government Loans are regulated and insured by the federal government. The three primary types of Government Loans (related to housing) are regulated through the FHA, the VA and the USDA. FHA Loans are the most common type of Government Loan.
Available only through approved lenders, FHA loans are explicitly insured by the Federal Housing Authority. Originally intended to promote home ownership, the FHA loan program provides expanded mortgage options for households that may have limited access to funds for a down payment, or credit histories that make the terms of an FHA loan more attractive than a comparable Conforming Loan. FHA loans are subject to separate FHA county loan limits.
VA Loans are subject to the oversight of the US Department of Veterans Affairs. Originally established as a benefit for veterans of the armed forces and national guard, the VA guarantees a portion of the loan so that private lenders are able to offer more favorable terms to qualified veterans. One of the most significant benefits of a VA Loan is that qualified veterans can obtain up to 100% financing for their primary residence.
USDA Loans are regulated by the US Department of Agriculture. Focused on housing in eligible rural areas, USDA Loans are intended to assist low- and moderate- income households to obtain mortgage financing for their primary residence.
A CHFA Loan generally refers to a loan that is paired with down payment assistance obtained through the Colorado Housing Finance Authority (“CHFA”).
The underlying loan can be either a Conforming Loan or an FHA / VA / USDA loan, and standard underwriting requirements for those programs still apply. The primary benefit of the CHFA down payment assistance program is that borrowers are able to access funds to help cover the down payment and/or closing costs — in the form of either (i) a Grant (up to 3% of the loan amount) or (ii) a ‘Silent Second’ mortgage (up to 4% of the loan amount) .
Because the CHFA program is intended to assist low and moderate income households, income limits, as well as other restrictions, do apply.
While there are a few different variations of reverse mortgages, the two most common include (i) a fixed rate lump-sum loan used to eliminate a traditional mortgage payment (thereby improving monthly cash flow) and (ii) an adjustable rate line of credit, which provides access to accumulated home equity that can be used to fund retirement cash flow needs in the future.
The FHA Home Equity Conversion Mortgage (‘HECM’) was originally established in 1988 to provide a mechanism for America’s retirement-age population to access the equity in their homes. An FHA ‘HECM’ loan (unlike other reverse mortgages) is insured by the Federal Housing Authority. A HECM allows homeowners age 62 or older to borrow money based on the accumulated equity in their primary residence.
Unlike other home loans, a HECM does not require any payments until the last remaining Borrower moves or passes away. The Borrower remains the owner and, while the HECM loan is outstanding, is obligated to: (i) keep the home in good repair, (ii) continue paying property taxes, and (iii) maintain property insurance on the home. The FHA HECM loan is a non-recourse loan, which means that in the event of default, the lender can only look to the sale of the property and not to any other assets of the Borrower or the Borrower’s heirs.