Buying a home can be an exciting dream, but determining how to make it happen can be an overwhelming journey. The mortgage industry is full of options, which can make picking the right one difficult. While there are several variations to mortgage loans, there are three basic types to consider when you’re looking to purchase a home.
Conventional loans are the most well-known type of mortgage loan available. They are often the most versatile in that you can use them for your primary residence, a vacation home, a second home, or even an investment property. Many other loan types are only available for a primary residence.
Conventional loans typically conform to the guidelines set forth by Freddie Mac and Fannie Mae. These guidelines are standards regarding credit, debt, and more. Additionally, there are limits to the amount you can borrow, which depend on the specific area you live in.
If your loan meets these standards, the lender can sell it to Freddie Mac or Fannie Mae if they need to free up cash. While they are still somewhat risky, the fact that they can be sold makes the lender willing to loan the money to those who meet the requirements.
While the specific requirements will likely vary between lenders, they typically include the following:
- 620 credit score or higher.
- Down payment of anywhere between 5 percent and 20 percent. In some circumstances, the down payment can be as low as 3 percent.
- PMI or private mortgage insurance with a down payment lower than 20 percent.
- DTI or debt-to-income ratio of 43 percent or less is preferred but may vary if other financial aspects are in great standing.
While conventional loans are a great solution for many people, not everyone meets the requirements. Additionally, some people want to purchase a home that is higher than the limits set forth by conventional loans. Fortunately, there are other options for homeownership.
Jumbo loans are a great option for people looking to purchase higher-priced homes. The limits for conventional loans tend to change from year to year. The most recent limits were about $647,000 for most areas and a little over $970,000 for expensive markets.
Jumbo loans pick up where conventional loans leave off. If you’re looking at a $1 million or $2 million home, you’ll need a jumbo loan to make it happen.
Before diving in headfirst, though, it’s important to understand that jumbo loans are non-conforming loans. As such, this makes them riskier for lenders, meaning that they typically have much more stringent requirements than conventional loans.
With some lenders, this might mean a higher down payment – sometimes up to 30 percent. Some even require that you have at least a six-month cash reserve put aside. Credit scores often need to be at least 680 for approval but some lenders require over 700. Additionally, closing costs on a jumbo loan may be much higher.
In short, if you want a higher-priced home, a jumbo loan is certainly an option. However, you can expect to jump through many extra hoops in order to get approved for one.
Government loans are also considered non-conforming loans. This is because their requirements are different from conventional loans as they are designed to help military personnel, low and moderate-income families, and those who have trouble meeting other conventional loan requirements.
However, they are a different type of non-conforming loan than jumbo loans as government loans are backed by the government. This actually makes them less risky for lenders and, usually, easier to obtain for home buyers. There are several types of government-backed loans, including the following three.
VA loans are backed by the U.S. Department of Veterans Affairs and provided to active military service personnel, veterans, and surviving spouses. The VA does not require a down payment, but some lenders do. The interest rates are typically very competitive, you are not required to carry private mortgage insurance, and the benefit can be used more than once. Additionally, closing costs are typically lower than with other loan types.
FHA loans are backed by the Federal Housing Administration and are helpful for borrowers who do not meet traditional mortgage requirements. They typically require a low down payment which is directly impacted by your credit score.
You can qualify for an FHA loan with as low as a 500 credit score, but this usually requires a 10 percent down payment. If you have a credit score of 580 or up, you can typically put as little as 3.5 percent down. You can learn more or see if you qualify by visiting https://capstonedirect.com/resources/fha-loans/.
USDA loans are an option for house hunters who have low to moderate income. Typically, this is less than 115 percent of your area’s median income. The property you wish to buy must be in a rural area as these loans are backed by the U.S. Department of Agriculture with the purpose of developing rural locations. Most lenders require a credit score of around 640, and you can usually get approved with a $0 down payment.