3 Types of Home Loans: Which One is Right for You?
With over 17 years in real estate the most important part of the home buying process is finding the right type of loan to fit the needs of you and your family. After the Great Recession of 2007 and an economy that was completely devastated by the housing crash it has always been my mission to educate the buyer on all of the options available before they start their home search.
The three major loan types: Conventional, FHA and VA and below you’ll have them explained and see how they compare.
1. Conventional Loans
- Borrower credit scores are typically higher
- Down payments are typically 5% or more
- Debt-to-income ratios are lower
How to calculate Debt-to-income ratio
Percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
Loan benefits are that Conventional mortgages generally pose fewer hurdles than FHA/VA loans
The challenge – you’ll need excellent credit and very little debt to qualify
2. FHA Loans
Federal Housing Administration mortgages are more flexible.
- People whose house payments will be a significant portion of their total income
- Borrowers with less than perfect credit
- Homebuyers with little money for down payment
The Federal Housing Administration doesn’t lend the money they simply insure the loan
The FHA allows borrowers can have a debt ratio of 56 percent or 57 percent of their income on monthly debt obligations, such as mortgage, credit cards, student loans and car loans. Conventional loans have a cap of 43%.
FHA borrowers minimum down payment is 3.5 percent with credit scores as low as 580 or lower.
Additional Cost: Each FHA loan has two mortgage insurance premiums:
- An upfront premium of 1.75 percent of the loan amount, paid at closing.
- An annual premium that varies. Most FHA homebuyers get 30-year mortgages with down payments of less than 5 percent. Their premium is 0.8 percent of the loan amount per year, or $66.67 a month for a $100,000 loan.
Benefits: FHA loans are often the only option for borrowers with high debt-to-income ratios and low credit scores.
3. VA Loans
Who they’re for: Most active-duty military and veterans qualify for Veterans Affairs mortgages. Many reservists and National Guard members are eligible. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.
No down payment is required from qualified borrowers buying primary residences.
Like FHA, VA does not lend money, but guarantees loans made by private lenders.
Additional 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 percent to 3.3 percent of the loan amount.
Sellers can pay closing costs, which lowers the out of pocket cost to the buyer. Borrowers are typically only out of pocket for the earnest money, but depending on the credits at closing I’ve seen buyers a leave closing with that money refunded.
Benefits: VA borrowers can qualify for 100 percent financing and the purchase is not just for a first tine home purchase.
Challenges: VA, does not have a cap on the amount you can borrow, but each county has t’sown loan limits in the amount eligible to borrowers without making a down payment.
All loans are not created equally, but these are the most popular and will you the basic information need before you start your home search.
