With recent changes (again) in the Home Affordable Refinance Program (HARP), I thought we would review some of the financing options out there and the related agencies. This information proves valuable for homeowners, real estate investors, and investors of MBS (Mortgaged Backed Securities).
A conventional loan is a lender agreement that’s not guaranteed or insured by the VA (Veterans Administration), FHA (Federal Housing Administration), or RHA (Rural Housing Service). A conventional loan can follow guidelines that meet the funding criteria of Fannie Mae and Freddie Mac (more about them a little later). If a loan follows the guidelines set by Fannie and Freddie, it’s considered to be “conforming”, whereas “non-conforming” loans don’t meet those qualifications, but can still be conventional.
Conventional loans can have either fixed or adjustable interest rates. Conventional loans also tend to carry the best interest rates and terms. There is another category of conventional loans, known as jumbo loans. Jumbo loans fall outside of Fannie and Freddie’s maximum loan amounts and they usually carry higher interest rates.
A large majority of conventional loans that meet the guidelines are guaranteed or purchased by Fannie and Freddie.
Who are Fannie and Freddie? Good question.
Fannie Mae stands for Federal National Mortgage Association; it was created as a Government Sponsored Enterprise (also known as a GSE). Fannie Mae was created back in 1938 to expand mortgage money by creating a secondary mortgage market. The secondary market that Fannie Mae created is the Mortgage Backed Securities (MBS) market. The market for Fannie Mae’s MBS’s has historically been extremely large and liquid containing pension funds, insurance companies and foreign governments among the largest investors. Fannie Mae was also created to concentrate its efforts into increasing the ability and affordability of homeownership for low, moderate and middle income Americans.
Freddie Mac stands for Federal Home Loan Mortgage Corporation. This was also created as a GSE chartered by Congress in 1970. Freddie Mac was created to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. It works similarly to Fannie Mae in that it guarantees and securitizes mortgages to form MBS’s.
Freddie and Fannie have been criticized because of their ties to the U.S. Government which allows them to borrow money at interest rates lower than those available by other financial institutions. It is believed that these portfolios created a large risk to the system and the U.S. economy. This risk was clearly defined on September 7, 2008 when the U.S. Government took over both Fannie Mae and Freddie Mac, placing them in a conservatorship to help avert a financial system melt down from the housing crisis.
Since that time Freddie and Fannie have used over $150 billion of taxpayer funds to keep afloat. The latest push is for Fannie and Freddie to write down loan principals. The Obama administration has offered incentives to the two GSEs to encourage this. I’ll dedicate a future article to this topic, but for now let’s get back to the programs available through Fannie and Freddie.
Flexible Mortgages – enables the homeowner with good credit a high loan to value and minimum down payment. Where the borrower gets the money for the down payment is flexible such as gifts or loans from family.
My Community Mortgage – this is for families with moderate to low income who have limited funds for closing and down payment. It also offers community servants such as police officers, firefighters, teachers, military members, and healthcare workers loans with a LTV (loan to value) of up to 97%.
Home Style Renovation – this loan helps people who buy a home that is in need of repairs, or refinancing an existing home that needs repairs and incorporates the repair loan into an existing mortgage. The loan is based on an “as completed quote” value rather than the unimproved present value.
Reverse Mortgages – are for people 62 years and older. This is a home loan based on the equity of their home. The owner may borrow against the home equity and not have to pay the loan back as long as they remain in the home. The loan is helpful for seniors who are having difficulty keeping up with cost of living expenses.
For more information about real estate investing, please contact your Education Counselor at Online Trading Academy and find out how to attend our Professional Real Estate Investor Course – it’s live and online.