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Mortgage loan programs: Which one is the best one for you?

Don’t know which loan program is the best one for you? Researching your mortgage options can be baffling. In this article, we break it down for you. From loan terminology to the requirements for all the top loan programs, it’s all right here.

Mortgage loan programs: Which one is the best one for you?

Loan terminology

Before diving into the specifics of each type of mortgage loan, it’s good to have an understanding of the basic terminology lenders use.

Credit score: Your credit score is a 3-digit number that shows lenders how likely you are to repay your debt. Most lenders use a FICO score (300-850) to predict risk associated with lending you money.

Down payment: Your down payment is the amount of cash you have available to pay out of pocket for a home.

Mortgage insurance: Mortgage insurance protects the lender if you (the borrower) don’t make payments on the loan.

Debt-to-income ratio: The percentage of your gross monthly income that goes toward re-paying all of your debt.

Terms of loan: The terms of a loan include your interest rate, the length of the loan, and other specific features of the loan.

  • Interest rate: The interest rate is the percentage of the loan that you agree to pay the lender to borrow the money to purchase a property.
    • With fixed-rate loans, you have the same, guaranteed interest rate throughout the life of the loan.
    • With adjustable-rate loans, the interest rate can (and will) change, and payments will go up and down with the changing rates.*
  • Time period: This is the length of the life of the loan, from beginning to end.
  • Other conditions: Any fees, penalties, or other features of your loan.

Conventional loans

Conventional loans are standard home loans for home buyers with good credit, a decent down payment, and a qualifying debt-to-income ratio.

Since they don’t have as many restrictions as other loans, conventional loans are faster to process and allow the buyer more flexible purchasing options.

Conventional loans are not guaranteed or backed by government programs like FHA or VA loans are. That said, most conventional loans are considered conforming loans, which follow standards set by Fannie Mae and Freddie Mac (government-sponsored entities). Loans that don’t fall within these set standards are non-conforming loans. (The biggest difference between conforming and non-conforming is that conforming loans can’t exceed $453,100.)

Credit score: Credit score requirements vary by lender. Generally speaking, a credit score of 620 or higher is best to qualify for a conventional mortgage. (The lower your credit score, the higher your interest rate and other fees will be.)

Down payment: Down payment requirements vary, but a minimum of 3% down payment is required. Some lenders require a larger down payment.

Mortgage Insurance: If you have less than a 20% down payment, you will have to pay for Private Mortgage Insurance (PMI). With a conventional loan, you have the option to cancel PMI later once you have at least 20% equity in the home (your property value is 20% more than you owe).

Debt-to-income ratio: In most cases, the maximum debt-to-income ratio allowed by lenders for a conventional loan is 43%. It can be more or less than that amount, depending on specific risk factors and cash reserves.

Terms
Interest rate: Conventional loans can be either a fixed rate or adjustable rate (ARM) loans.
Time: Conventional loans come in terms anywhere from 10 to 30 years.

FHA loans

FHA loans are designed to make home-ownership a reality for borrowers that don’t qualify for the stricter guidelines of a conventional loan. There are no minimum or maximum income requirements for the program.

Though the financial requirements are less strict, FHA loans require borrowers to pay for mortgage insurance that cannot be canceled during the life of the loan.

FHA loans have stricter guidelines regarding the property itself. The home you’re buying must be your primary residence and has to pass a rigid inspection.

As the name implies, FHA loans are backed by the Federal Housing Administration. They are insured by the Department of Housing and Urban Development (HUD). Private banks and credit unions issue the loans.

Credit score: You must have a credit score of at least 500 to qualify for an FHA loan. A higher credit score (580) is required if you have a low down payment (3.5%).

Down payment: You can put as little as 3.5% down with an FHA loan, but to put this amount down, you have to have a higher credit score (580). If your credit score is less than 580, you may be required to put at least 10% down.

Unlike conventional loans, FHA loans allow you to use gifted money (from family/friends) or grant money from assistance programs to help with a down payment.

Mortgage Insurance: As mentioned previously, FHA requires mortgage insurance on all loans. Borrowers pay an upfront mortgage insurance cost (1.75% of loan amount) and an ongoing monthly insurance fee (between .45% and 1.05% annually).

Debt-to-income ratio: Debt-to-income ratio must be 50% or less to qualify, depending on other financial circumstances.

Terms
Interest rate: FHA loans are fixed-rate loans, meaning the borrower has the same interest rate for the life of the loan.
Time: FHA offers 15 to 30-year loans.

VA loans

VA loans are Veterans Affairs mortgages and are available to most active military members, reservists, National Guard, and veterans. To qualify for a VA loan, you must meet certain length-of-service time requirements – this varies depending upon the type of service.

VA loans are generally easier to obtain and have better terms than conventional loans for those that qualify. Private banks and credit unions issue VA loans, but they’re guaranteed by the Department of Veterans Affairs.

VA loans require that you reside in the property you purchase. You can purchase an investment property, such as a duplex, with a VA loan as long as you live in one of the units.

Credit score: The VA doesn’t have a minimum set credit score to qualify for a VA mortgage, but lenders who issue the loans usually do. Lenders typically like to see a credit score of 620 or higher.

Down payment: Most VA loans don’t have a minimum down payment requirement.

Funding Fee: VA loans have a one-time funding fee, ranging from 1.25% to 3.3% of the loan amount. The fee varies depending on your down payment amount and other financial factors. This fee can often be financed with the mortgage. The VA requires this fee to help with closing costs and the cost associated with foreclosures (since they don’t require mortgage insurance).

Debt-to-income ratio: The VA itself doesn’t establish a fixed, maximum debt-to-income ratio. Generally, if your debt-to-income ratio is higher than 41%, your  lender will require additional proof of ability to repay the loan.

Terms
Interest rate: Interest rates tend to be lower on VA loans. Borrowers can get fixed or adjustable rate loans (ARM) through the VA.
Time: 15 and 30-year loan terms are available.

USDA loans

USDA loans are designed to help people buy homes in rural areas. The USDA provides affordable loan programs to those that don’t qualify for conventional loans. 97% of U.S. land is eligible for USDA loans, making it widely available, no matter where you want to live.

USDA loans have upper limits for income eligibility, which are dependent upon where you live and the size of your household.

The USDA loan program is sponsored and backed by the United States Department of Agriculture, but private banks and credit unions issue the loans.

Credit score: There is no set minimum credit score requirement for USDA loans. However, if your credit score is 640 or less, you will need to provide additional information to prove you can make payments.

Down payment: The USDA offers loans with no down payment.

(Note: If you have enough cash reserves to make a 20% down payment, you do not qualify for this type of loan.)

Mortgage insurance: USDA loans require an upfront mortgage insurance fee equal to 1% of the loan amount. Also, monthly mortgage insurance installments are required (.35% annually).

Debt-to-income ratio: The maximum debt-to-income ratio for this type of loan is 41%.

Terms
Interest rate: USDA loans offer lower rates than many other types of loans. Fixed rate loans are the only option for this program (no adjustable rate loans).
Time: Available in 15 and 30-year terms.

Local loan programs

If you’re buying your house in Des Moines, Iowa, there are additional programs available with financial incentives and assistance that could help you buy a home.

Are you ready to buy a home? Buying a home can, at times, feel intimidating and overwhelming. But it doesn’t have to be. At Coluzzi Real Estate, we answer all your questions and simplify the process every step of the way. Please don’t hesitate to contact us at any time!

*At the beginning of ARM (adjustable rate mortgage) loans, the rate is lower for a specified period, but after that, the interest rate fluctuates with a market index. (There is a stated cap on all ARM loans, so they can only go so high.) For instance, with a 7/1 ARM, the rate is fixed for the first seven years, and after that, it follows the index (not to exceed the cap).

 

photo credit: pixabay

2018-07-23T11:25:22+00:00

About the Author:

Amanda has lived in the Des Moines area since 1999, where she and her husband have bought and sold a handful of homes over the years, including a recent flip. Amanda enjoys writing, obsesses about personal finance and is fond of looking at houses. She loves sharing useful tips and info to make life easier for anyone wanting to buy or sell a home. In her spare time, Amanda cherishes time with her family, volunteers with IHYC, gardens, hikes, and practices TaeKwonDo.