You should know these 3 loan types before you go mortgage shopping.
Conventional loans
Who they cater to: Conventional mortgages are ideal for borrowers with good to excellent credit.
In plain terms what is a conventional loan: Conventional mortgages are "plain vanilla" home loans. They follow fairly conservative lender guidelines for:
- Borrower credit scores.
- Minimum down payments.
- Debt-to-income ratios.
Debt-to-income ratio
Percentage
of monthly income that is spent on debt payments, including mortgages,
student loans, auto loans, minimum credit card payments, child
support etc. This percentage is much more conservative for conventional mortgages than it would be for FHA.
Closing costs, down payments, mortgage insurance, interest and points can mean
the borrower has to show up at closing with a sizable sum of money out
of pocket.
Find out more about closing costs, the loan process and how to save money.
Pros:
Conventional mortgages generally pose fewer hurdles than FHA-Federal
Housing Administration or VA-Veterans Affairs mortgages, which may take
longer to process.
Cons: You'll need excellent credit to qualify for the best interest rates. Lower FICOs can impact the rate depending on amount of down payment and/or loan to value.
FHA loans
Who they're for: Federal Housing Administration mortgages have flexible lending standards to benefit almost anyone:
- People whose house payments will be a big chunk of take-home pay.
- Borrowers with low credit scores.
- Homebuyers with small down payments and refinancers with little equity.
How they work: The Federal Housing Administration does not lend money. It insures the mortgages.
The
FHA allows borrowers to spend up to 56% or 57% of their income on
monthly debt obligations, such as mortgage, credit cards, student loans
and car loans. In contrast, conventional mortgage guidelines tend to cap
debt-to-income ratios at around 45% and sometimes less.
FHA borrowers can do minimum down payments of 3.5%. Borrowers can
also qualify for FHA loans with credit scores of 580 and sometimes even lower.
One of the major cost differences: Each FHA loan has 2 mortgage insurance premiums:
- An upfront premium of 1.75% of the loan amount, paid at closing. (this can be financed)
- An annual premium that varies from a low of 0.45% to a high of 0.85%. This premium is rolled into the monthly mortgage payment for the life of the loan. (the is FHA's version of the more commonly heard term PMI)
The good: FHA loans are often the only and best option for borrowers with high debt-to-income ratios and low credit scores.
The not so good:
FHA mortgage insurance premiums usually are higher than premiums for
private mortgage insurance. To get rid of FHA premiums, you must
refinance the loan.
VA loans
Who they're for:
Most active-duty military and veterans qualify for Veterans Affairs
mortgages. Many reservists and National Guard members are also eligible.
Spouses of military members who died while on active duty or as a result
of a service-connected disability may also apply.
How they work:
No down payment is required from qualified borrowers buying primary
residences. The VA does not lend money but like FHA actually guarantees loans made by
private lenders.
Cost:
The VA charges an upfront VA funding fee, which can be rolled into the
loan or paid by the seller. The funding fee varies from 1.25% to 3.3% of
the loan amount. (the amount of the funding fee depends in part on how many times a VA loan has been obtained by the borrower)
The VA
allows sellers to pay closing costs but doesn't require them to. So the
buyer might need money for closing costs. Borrowers may also need money
for the earnest-money deposit.
What's good: VA borrowers can qualify for 100% financing. Veterans do not have to be first-time buyers and may reuse their benefit.
What's not as good: There are limits on loan amounts. The limits vary by county and State.
*source Yahoo! Finance
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