mortgage

Conventional, VA, FHA mortgage

Anyone tuned-in to the mortgage market knows that it's harder to get financing these days, unless you have premium credit ... or close ties to a loan officer.

All kidding aside, even though skittish lenders are seeking shelter from the subprime loan fallout they helped create, they're still selling loans. And plenty of people continue to shop for mortgages.

Existing-home sales reached a seasonally adjusted annual rate of 5 million units in July 2008, according to the National Association of Realtors. Though that's down from 5.76 million a year ago, the mortgage market cannot be declared dead yet.

Nevertheless, lenders are tightening underwriting standards, making it tougher to get a conventional fixed-rate or adjustable-rate loan.

Government loan programs, too, are getting sucked into the vortex of the subprime mess and are undergoing limited reform.

FHA loans, increasingly popular with first-time homebuyers, are going to be slightly harder to get due to the newly inked federal housing bill. And VA loans, possibly the most attractive of the bunch, are restricted to buyers who meet certain eligibility guidelines, such as satisfactory military service.

Picking out a mortgage suited to your needs can be confusing, especially if you qualify for more than one kind. Compare these three loan types before you go mortgage shopping.

Types of mortgages
  1. Conventional loans
  2. VA loans
  3. FHA loans

Conventional loans

How they work: "The dominant number of loans made in the conventional market use Fannie Mae and Freddie Mac guidelines for conforming loans," says John Councilman, federal housing chairman for The National Association of Mortgage Brokers in McLean, Va. The U.S. government bailout of Fannie Mae and Freddie Mac may affect both entities' underwriting guidelines going forward, but no changes have been made yet.

Conventional loans are "conforming" if they are generally $417,000 or less for a single-family home. Conforming loan limits can be higher in pricier regions of the country. For example, in such states as Alaska and Hawaii, it's $625,500.

There are also established guidelines for borrower credit scores, income requirements and minimum down payments. For example, most conventional loans require somewhere between 5 percent and 20 percent down.

"Right now those guidelines are changing frequently but they should have at least a 620 credit score," Councilman says. "Anything below a 740 credit score and they (lenders) are going to start adding fees which can be quite sizable, in the several-percent range, as borrowers' credit scores drop compared to loan-to-value (LTV)."

Conventional loans can be conforming or nonconforming. Loans above the lending limits set by Fannie Mae and Freddie Mac are called nonconforming or jumbo loans.

Most conventional mortgages have either fixed or adjustable interest rates. Typical fixed interest rate loans have a term of 15 or 30 years. A shorter-term loan usually results in a lower interest rate. Adjustable-rate mortgages, or ARMs, fluctuate in relation to the rate of a standard financial index, such as the LIBOR. Monthly payments can go up or down accordingly.

Featured Rates

Cost: Origination fees, down payments, mortgage insurance, points and appraisal fees can mean the borrower has to show up at closing with a sizable sum of money out-of-pocket, or be prepared to roll over some of these costs into their mortgage amount, which may result in a higher loan rate.

Pros: Conventional mortgages generally pose fewer bureaucratic hurdles than FHA or VA mortgages, which may take longer to process because of the red tape. And because these mortgages generally require higher down payments than the others, home equity can build up faster.

To read about the pros and cons of fixed-rate versus adjustable-rate mortgages, see Bankrate's story on "Loan products for big-ticket items."

Cons: You'll need excellent credit to qualify for the best interest rates. Also, many lenders require higher down payments than for government-backed loans. In declining markets such as this one, borrowers may only qualify for 90 percent loan-to-value and have to come up with the rest out of pocket. Some lenders may require as much as 20 percent down, particularly for condominiums in markets where it's difficult to get mortgage insurance.

Who they're good for: Conventional loans are ideal for borrowers with excellent credit who can afford a down payment of 5 percent or more.

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