Wednesday, February 16, 2022 / by Jeff Lovato
Not all mortgage products are created equal. Some have more stringent guidelines than others. Some lenders might require a 20% down payment, while others require as little as 3% of the home’s purchase price. To qualify for some types of loans, you need good credit records. Others are inclined toward borrowers with less-than-stellar credit.
The U.S. government isn’t a lender, but it does guarantee certain types of loans that meet stringent eligibility requirements for income, loan limits, and geographic areas. Here’s a rundown of various possible mortgage loans.
1. Conventional Mortgages
A conventional loan is a loan that is not backed by the federal government agencies which are originated and serviced by private mortgage lenders like banks, credit unions and other financial institutions. Some lenders also offer conventional loans with low down payment requirements and no private mortgage insurance.
2. Conforming Mortgage Loans
Conforming loans are bound by maximum loan limits set by the federal government. These limits vary by geographic area.
3. Nonconforming Mortgage Loans
Nonconforming loans generally can’t be sold or bought by Fannie Mae and Freddie Mac, due to the loan amount or underwriting guidelines. Jumbo loans are the most common type of nonconforming loans. They’re called jumbo because the loan amounts typically exceed conforming loan limits.
These types of loans are riskier to a lender, so borrowers typically must show larger cash reserves, make a down payment of 10% to 20% (or more), and have strong credit.
4. Government-Insured Federal Housing Administration (FHA) Loans
Low- to moderate-income buyers purchasing a house for the first time typically turn to loans insured by the Federal Housing Administration (FHA) when they can’t qualify for a conventional loan. Borrowers can put down as little as 3.5% of the home’s purchase price.
FHA loans have more-relaxed credit score requirements than conventional loans. However, the FHA doesn't directly lend money; it guarantees loans by FHA-approved lenders. There is one drawback to FHA loans. All borrowers pay an upfront and annual mortgage insurance premium (MIP)—a type of mortgage insurance that protects the lender from borrower default—for the loan’s lifetime.
FHA loans are best for low- to moderate-income borrowers who can’t qualify for a conventional loan product or anyone who cannot afford a significant down payment.
5. Government-Insured Veterans Affairs (VA) Loans
The U.S. Department of Veterans Affairs (VA) guarantees homebuyer loans for qualified military service members, veterans, and their spouses. Borrowers can finance 100% of the loan amount with no required down payment. Other benefits include fewer closing costs (which may be paid by the seller), better interest rates, and no need for PMI or MIP.
VA loans do require a funding fee, a percentage of the loan amount that helps offset the cost to taxpayers. The funding fee varies depending on your military service category and loan amount. The following service members do not have to pay the funding fee:
- Veterans receiving VA benefits for a service-related disability
- Veterans who would be entitled to VA compensation for a service-related disability if they didn’t receive retirement or active duty pay
- Surviving spouses of veterans who died in service or from a service-related disability
- A service member with a proposed or memorandum rating stating eligibility for compensation due to a pre-discharge claim
- A service member who received the Purple Heart
VA loans are best for eligible active military personnel or veterans and their spouses who want highly competitive terms and a mortgage product tailored to their financial needs.
6. Government-Insured U.S. Department of Agriculture (USDA) Loans
The U.S. Department of Agriculture (USDA) guarantees loans to help make homeownership possible for low-income buyers in rural areas nationwide. These loans require little to no money down for qualified borrowers, as long as properties meet the USDA’s eligibility rules.
USDA loans are best for homebuyers in eligible rural areas with lower household incomes, little money saved for a down payment, and who can’t otherwise qualify for a conventional loan product.
Mortgage terms, including the length of repayment, are a key factor in how a lender prices your loan and your interest rate. Fixed-rate loans are what they sound like: a set interest rate for the life of the loan, usually from 10 to 30 years.
Fixed-rate loans are ideal for buyers who plan to stay put for many years. A 30-year fixed loan might give you wiggle room to meet other financial needs. However, if you have the appetite for a little risk and the resources and discipline to pay your mortgage off faster, a 15-year fixed loan can save you considerably on interest and cut your repayment period in half.
Adjustable-rate mortgages (ARMs) have a fixed rate for an initial period of up to 10 years, but after that period expires the rate fluctuates with market conditions. These loans can be risky if you’re unable to pay a higher monthly mortgage payment once the rate resets.
ARMs are a solid option if you don't plan to stay in a home beyond the initial fixed-rate period or know that you intend to refinance before the loan resets. Why? Interest rates for ARMs tend to be lower than fixed rates in the early years of repayment, so you could potentially save thousands of dollars on interest payments in the initial years of homeownership.
First-Time Assistance Programs
Special programs sponsored by states or local housing authorities offer help specifically to first-time buyers. Many of these programs are available based on buyers’ income or financial need. These programs, which usually offer assistance in the form of down payment grants, can also save first-time borrowers significant money on closing costs.
The U.S. Department of Housing and Urban Development (HUD) lists first-time homebuyer programs by state. Select your state and then choose "Homeownership Assistance" to find the program nearest you.
Mortgages for First-Time Buyers
All these loan programs (with the exception of first-time homebuyer assistance programs) are available to all homebuyers, whether it’s your first or fourth time purchasing a home. Many people falsely think FHA loans are available only to first-time buyers, but repeat borrowers can qualify as long as the buyer has not owned a primary residence for at least three years leading up to the purchase.
Choosing the loan that's best for your situation relies primarily on your financial health: your income, credit history and score, employment, and financial goals. Mortgage lenders can help analyze your finances to help determine the best loan products. They can also help you better understand the qualification requirements, which tend to be complex.
No matter which type of loan you choose, check your credit report beforehand to see where you stand. You’re entitled by law to one free credit report from each of the three main reporting bureaus each year through AnnualCreditReport.com. From there, you can spot and fix errors, work on paying down debt, and improve any history of late payments before you approach a mortgage lender. To further protect your credit report from errors and other suspicious marks, consider utilizing one of the best credit monitoring services currently available.
It can be advantageous to pursue financing before you get serious about looking at homes and making offers. You’ll be able to act more quickly and may be taken more seriously by sellers if you have a preapproval letter in hand.
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