Updated Mortgage Programs for 2021
The most popular mortgage programs for 2021 include:
- Government-backed loans (FHA, VA, and USDA)
- Conforming loans from Freddie Mac and Fannie Mae
- Non-conforming or portfolio mortgage programs from private lenders
Government-backed loans promote homeownership and help borrowers with challenges. Conforming loans are the most popular in the US and work for most mainstream borrowers. And non-conforming loans address special needs like very high loan amounts, credit problems, or alternative income verification.
The US government created guaranteed home loans to increase homeownership rates and to help certain categories of homebuyers.
VA home loans
The Department of Veterans Affairs administers the VA mortgage program. The VA mortgage is one of the best and lowest-cost mortgages available. However, it’s not available to just anyone. The VA mortgage guarantee is an earned benefit for members and veterans of the US armed forces. The government does not loan money. Instead, it guarantees VA loans so lenders won’t lose if borrowers default. That encourages lenders to make these loans with no down payment.
Here are the advantages of VA home loans:
- VA loans require no down payment
- There are no official minimum credit scores, maximum debt-to-income (DTI) ratios, or loan limits.
- VA home loans require no monthly mortgage insurance.
- VA mortgage rates are often lower than those of other programs. The government guarantee removes most of the risk to lenders so they can afford to offer lower rates.
- These home loans are assumable, which can help you sell your home faster or for more money.
The main disadvantage of VA mortgages is the funding fee that almost all applicants pay. (Disabled vets can receive a waiver). If you have a substantial down payment or home equity, it can be cheaper to choose a conventional (non-government) home loan with a low or no mortgage insurance premium — especially if your credit is excellent.
FHA home loans
FHA home loans are available to anyone who qualifies for them. The Department of Housing and Urban Development (HUD) guarantees the loans and oversees the FHA mortgage program.
The advantages of FHA home loans include:
- Borrowers can have credit scores as low as 500.
- Homebuyers can get the entire down payment from gift funds or down payment assistance programs.
- DTI ratios can be as high as 57% for highly qualified applicants.
- With the 203(k) program, you can finance a combined home purchase and renovation with one loan.
The disadvantages of FHA loans pertain to the required mortgage insurance premium (MIP). They include a 1,75% upfront premium, which you can choose to include in your loan balance, and a monthly premium that you’ll pay for the entire life of the loan. FHA mortgage insurance cannot be canceled.
USDA home loans
USDA home loans come in two flavors: a guaranteed loan like the FHA and VA programs, and a direct program unique to the USDA. Eligibility for direct loans is limited to applicants with very low incomes. Most borrowers use the guarantee program. USDA home loans have income-eligibility requirements and geographical eligibility rules. Only homes outside major metropolitan areas qualify.
USDA mortgage advantages:
- There is no down payment requirement.
- Underwriting is flexible.
- Repayment terms can be up to 33 years to reduce payments.
- Mortgage insurance is much cheaper than it is for FHA loans. (1% upfront and .35% each year, divided by 12).
The disadvantages of the USDA home loan mostly relate to its limited availability. About half of all residences in the US meet geographical guidelines. But applicants’ income cannot exceed specified limits for their family size. The paperwork can be a challenge and many lenders do not fund USDA home loans. Finally, borrowers must pay mortgage insurance premiums for the life of the loan.
Conforming Mortgages (Fannie Mae and Freddie Mac)
Conforming mortgages are conventional (non-government) home loans that meet the guidelines of Fannie Mae and Freddie Mac. These loans get their name because they “conform” to those guidelines. This allows the two mortgage corporations to buy the loans from lenders and combine them into pools of loans. They then sell shares in the pools to investors.
Conforming mortgages are the most popular loan programs in the country. Here are their main advantages:
- Conforming mortgages are widely available, which keeps their pricing down.
- The minimum down payment can be as low as 3%.
- Lenders use automated underwriting systems (AUS) to underwrite most loans and borrowers can get decisions in minutes.
- For highly qualified borrowers, conforming mortgages are among the least expensive.
- HomeReady and Home Possible programs for income-eligible and first-time buyers offer flexible underwriting and discounted mortgage insurance.
- Construction to permanent mortgages let you take a construction loan and permanent financing with a single application and closing.
The disadvantages include limitations on loan size and mortgage insurance requirements for loans with less than 20% down. The minimum credit score is 620 and underwriting guidelines can be much stricter than those of government-backed and portfolio loans. For applicants with higher-risk profiles, these mortgages can be more expensive than government-backed loans.
Non-Conforming, Portfolio, and Non-Prime Home Loans
All conventional mortgages that are not conforming loans are non-conforming loans. As the same says, they do not conform to Fannie Mae or Freddie Mac guidelines.
These loans often have other names as well. The name usually references the reason that the loan does not conform.
Jumbo and super-jumbo loans
Jumbo mortgages are loans that don’t meet conforming guidelines because of their size. Their amounts exceed the limits set by Fannie Mae and Freddie Mac. Super-jumbo loan amounts can head into the millions.
In general, jumbo mortgage underwriting guidelines are stricter than conforming guidelines. Expect to put at least 10% down. And the larger the loan, the higher the down payment percentage. Loans exceeding $2m might require a minimum down payment of at least 30% and the highest loan amounts might demand down payments of 40% to 50%.
Non-prime has replaced the term subprime. They are not the same thing. In the past, you could find loans with no down payment that allowed applicants to state their income and have very low credit scores. That layering of one risk on top of another created a crisis of foreclosures that took down the entire US economy by 2010.
These new products are different. First, all lenders must by law verify the applicant’s income and make sure he or she can afford the loan. That’s called the Ability to Repay rule or ATR. Second, you won’t find a loan for bad credit with no down payment requirement.
Examples of non-prime loans include loans for people one day out of bankruptcy or foreclosure, loans for people with 500 credit scores if they have a co-signer and loans for those with high debt-to-income ratios.
Bank statement loans
Bank statement loans are marketed to self-employed applicants with a lot of tax write-offs. Aggressive write-offs can save a lot of money at tax time. But often, these borrowers can’t qualify for a mortgage.
Fortunately, the ATR rule just says lenders have to verify the borrower’s income. They don’t have to do it with tax returns.
With a bank statement loan, the lender averages the borrower’s monthly business or personal account deposits, usually over a 24-month period. They discount this by some percentage and use that figure as a substitute for taxable income.
The term “portfolio loans” just means that the mortgage lender does not sell the loans to investors. Lenders keep portfolio loans on their own books, and they alone are on the hook if borrowers default. because investors are not involved, portfolio lenders can make up their own guidelines as long as they follow the law. They can come up with very creative and sometimes risky loans.
What about non-QM loans?
Non-QM stands for “non-qualifying” mortgage, which means it might have some riskier features than the plain vanilla “qualified” mortgages or QMs.
Some people use the term “non-QM” and non-conforming interchangeably. But that is not correct. All non-QM loans are non-conforming. But some non-conforming loans are QMs. They have safety features like fixed interest rates, fairly high minimum credit scores, bigger down payments, and low debt-to-income ratios. They are non-conforming only because their amounts are larger.
Ask an Expert
There are many mortgage programs available in 2021. And it’s not easy to know their guidelines and pros and cons, and decide which loan is right for you. Fortunately, a good mortgage lender can help you decide. He or she will ask you a few questions about your loan purpose, credit and income, how long you plan to own the home, and tolerance for risk. Then, your loan professional can recommend one or two products that will best meet your needs and fit your qualifications.