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The alphabet soup of lending


November 18, 2013
Most businesses, especially those as heavily regulated as the mortgage business is, have their own initialized jargon. Want to know what some of those initials mean, in regard to real estate loans?

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FHA: Federal Housing Administration. This agency provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories, and is the largest insurer of mortgages in the world for single and multi-family homes. FHA is not a lender. It is an agency that provides mortgage insurance on loans.

FHA loans have become a major source of financing since the real estate collapse years ago. Currently in San Diego County, FHA insured loans have a monetary limit of $697,500, and require only a 3.5 percent down payment, with liberal underwriting guidelines.

HUD: Department of Housing and Urban Development. HUD's mission is to strengthen the housing market by creating affordable homes for all. Part of HUD's job is to bolster the economy and protect consumers, while meeting the need for affordable rental homes, using housing as a platform for improving the quality of life. The head of HUD is a member of the president's cabinet.

FNMA: Federal National Mortgage Association. Commonly known as Fannie Mae, or Fannie. Fannie, along with its cousin Freddie Mac — The Federal Home Loan Mortgage Corporation, also known as just Freddie — provides a secondary market for mortgage loans. Like FHA they are not lenders. A bank or mortgage banker like Summit Mortgage will make a home loan and then sell it, usually along with other loans, to Fannie and Freddie.

MBS: Fannie and Freddie in turn issue Mortgage Backed Securities (MBS) and sell them on Wall Street. You may very well own some MBSs in your investment or retirement accounts. This arrangement provides liquidity to the mortgage market and keeps the cost of home loans low.

VA: US Department of Veterans Affairs. The VA is also a Cabinet level department with a mission statement related to our veterans and active duty military. One part of that mission is a home loan program. Like Fannie, Freddie and HUD, the VA does not make loans. They guarantee 25 percent of a VA loan, which allows lenders to make VA loans with no money down. The risk to the bank is the same as if the borrower had put 25 percent down. Aside from the no down payment feature of these loans, the guidelines are also set to allow more applicants to qualify.

USDA: United States Department of Agriculture. Yes, we are still talking about real estate loans! The USDA has a division know as RD, or Rural Development, that guarantees home loans in rural areas like most of Valley Center. The loans can potentially go to 105 percent of the purchase price, but there are restrictions on income for eligibility with this program. There are also some quirks. For example, you cannot finance a swimming pool, but you can buy a home with a pool if the appraisal comes in high enough. These quirks make this particular program a minor player in the real estate finance world.

There are many more initialized agencies and programs in loans and lending, but this scratches the surface and hopefully explains a few things regarding the alphabet soup of home loans. Feel free to contact me if you'd like to learn more, and stay tuned for my future home loan related columns.

John Yeager is the Valley Center Branch Manager for Summit Mortgage, NMLS #219612. He can be reached at 760-749-8931 or emailed at jyeager@summit-mortgage.com. His website is www.john-yeager.com.

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