Most applicants are innundated with a variety of terms describing mortgages that are available on the market. The most popular include, Fannie Mae, Freddie Mac, and FHA.

FHA was created by the Federal Government to provide affordable housing financing for qualified borrowers. FHA insures the loan, limiting the lender's risk. The borrower pays an upfront insurance premium which is approximately 1.5% of the loan amount. This money can be financed directly in the loan amount. The borrower also pays a monthly premium of .5% of the loan amount divided by 12 months. FHA requires down payment of 3%. This money can be a gift. No reserves are required.

Borrowers must provide proof of sufficient income to show ability to pay the mortgage. FHA guidelines are more relaxed, such as; a bankruptcy that was discharged at least 2 years ago, the use of alternative credit (utilities, cable TV, auto or medical insurance premiums, child care, school tuition, furniture or appliance store accounts) in lieu of traditional credit, and higher debt to income ratios. FHA interest rates are extremely competitive with conventional rates.

Fannie Mae loans are conventional loans made at the risk of the lender without benefit of any government guarantee or government insurance. A conventional loan with an LTV (loan to value ratio) of greater than 80% requires primary mortgage insurance, which can be paid monthly. The borrower must have 5% of his/her own funds for the down payment and 2 months reserves on deposit. Closing costs must be paid by the borrower.

Requirements of a conventional loan applicant include excellent credit, job stability with sufficient income, a sizable down payment, and low debt to income ratios. Borrowers who meet Fannie Mae guidelines are rewarded with an interest rate only slightly lower than an FHA interest rate.

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