Conventional Versus Government Loans in San Diego
by Mark Murphy
Many of the problems in San Diego real estate were caused by lending excesses in the past, when almost anyone could get a mortgage and few buyers bothered to investigate the mortgages they were getting. Those excesses have resulted in fewer loan types being available today, especially when it comes to conventional financing.
During the Bubble Years, many mortgage borrowers in San Diego bought homes using 100% conventional financing, often with an 80 percent first mortgage and a 20 percent second lien. This was done to eliminate the need for expensive Private Mortgage Insurance (PMI), which helped to keep monthly payments down. Few people in our area used Government loans in those days because many of our prices were outside loan limits and conventional financing was so easy to get. Additionally, there was a perception with lenders and real estate agents alike that VA and FHA loans were just too complicated, expensive and took too long to process.
In today’s market, the tables have completely turned, and conventional loans are more difficult and expensive to obtain, especially for home buyers with limited financial resources. These days, a 20 percent down payment is almost always required for conventional loans and underwriting can be very strict. Buyers need excellent credit, employment verification, verification of funds, and properties also need to appraise at a value that will support the loan or the required loan-to-value ratio.
Currently, the two most common types of conventional loans are fixed rate mortgages where the interest rate remains the same for the life of the loan, which can range from 5 to 30 years, with 15 and 30 year mortgages being the most common. A second type of conventional financing is the adjustable rate mortgage, where the starting rate is usually lower for a set period of time, and after the first year, two or maybe seven converts to a rate that fluctuates with market conditions. Other types of conventional financing might include balloon mortgages, where for example, the full loan amount becomes due and payable at a certain point in time, while bridge loans provide money for home buyers to purchase homes before their existing home have sold.
Because I am an Army veteran, I will be able to use VA financing when I purchase a home. VA loans are available to military veterans and offer 100% financing, whereby the US Government guarantees the loan (as opposed to FHA, which insures the loan for a mandatory fee). With a VA loan, I may be able to get a seller to agree to pay my non-recurring closing costs as well as the 1% funding fee that is collected at closing of the loan process. The monthly payment on a VA loan (as well as FHA financing) will include an escrow account that budgets money for property taxes and homeowner insurance. This is done to insure that both taxes and insurance are paid in a timely fashion and that both veteran and lender are protected.
Those who have money to put down on a conventional mortgage and can also qualify for the mortgage loan they are seeking may prefer conventional financing over government loans because they are free to manage their own money and do not have to set up an escrow account if they don’t wish to do so. With excellent credit, they may also be able to get a better rate. Finally, most home sellers and their real estate agents prefer conventional financing because they feel there is less chance of a deal falling through because the buyer is putting down at least 20 percent and may not be as likely to ask for closing cost assistance.
In conclusion, both conventional and government loans have an important place in today’s real estate market. Without these mortgage financing vehicles, home ownership would be out of reach for most Americans and we would probably become a nation of tenants.