There are 4 main mortgage loan types. Each of them has different guidelines on employment, credit history, debt ratio, asset requirements, and property standards. Understanding the underwriting differences will help you decide which mortgage type is right for you.
The 4 main loan types include: (1) conventional, (2) Federal Housing Administration (FHA), (3) United States Department of Veterans Affairs (VA), and (4) the United States Department of Agriculture (USDA-RHS loans). Below is a description of each mortgage type and some of their major differences.
Conventional Mortgage
Conventional mortgages following guidelines issued by Fannie Mae and Freddie Mac which set the maximum mortgage amount, property requirements, credit standards, debt to income guidelines, and down payment minimums. The current single family conforming mortgage limit is $417,000. Conventional loans can be fixed, variable, or balloon mortgages. This mortgage type is typically packaged with other conventional mortgages and sold as mortgaged backed securities.
FHA Mortgage
The United States Department of Housing and Urban Development (HUD) administers FHA loans. FHA loans require a 3.50% down payment which can be a gift from a relative or down payment assistance from an eligible source. The credit standards for this loan type are the easiest to qualify for. This loan type also has certain guidelines that other loan types do not have that cater to individuals with deferred student loans, past bankruptcies or foreclosures, rental income, and other income sources (child support, alimony, entitlement income). The maximum mortgaged amount is set per State and County. For most areas FHA loans can be well into the 200,000 range for a single family dwelling. FHA also offers rehabilitation loans, which allow monies to be added to a mortgage for repairs and/or improvements. FHA loans charge an upfront mortgage insurance premium on all loans and a monthly mortgage insurance premium up to 1.35% annually. The monthly mortgage insurance is charged for the life of the loan.
VA Mortgage
The VA loan is guaranteed by the United States Department of Veterans Affairs. This loan type is exclusively for veterans or service personal to obtain loans at competitive rates and terms with no down payment or mortgage insurance. The VA does not lend money directly to the borrower it only guarantees the lender will recover 25% of the mortgaged amount if the veteran goes into default. The maximum mortgaged amount is generally $417,000 in most areas. The underwriting loan standards for this loan type are looser than conventional loans. This loan type accepts lower credit scores, only one debt ratio is considered, and typically no reserves are required of the borrower. To qualify for a VA loan, one must be a veteran, active duty personal, reservist, or National Guard Member with an honorable discharge. Also surviving spouse may be eligible for this loan type if certain conditions are met.
USDA/RHS Mortgage
The United States Department of Education guarantees RHS loans. This loan type requires no down payment but has a monthly maintenance fee similar to private mortgage insurance. This loan type is only available in designated rural areas. Please refer to the USDA website for specific locations. Income qualifications for this loan type allow applicants to earn up to 115% of the medium household income for the area. In certain circumstances USDA loans allow buyers closing costs to be rolled into the loan (up to 3% of the sales price). USDA loans have a 2% upfront mortgage insurance premium; in addition they have a monthly insurance premium of.5% annually. The USDA also has a program where very low income families can apply for a mortgage directly through a USDA office and qualify for a special interest rate.
Everyone's situation is different. Understanding the basic guidelines of each mortgage type may assist homebuyers in making the best decision when financing their next home. Consult with a licensed loan officer to discuss your financing options. It is always in a buyer's best interest to get pre-approved prior to looking for a house. A pre-approval will let you know what mortgage type, down payment, and how much you qualify for. The pre-approval will also make you a stronger buyer when bidding on a home.
It is always in a potential homebuyers best interest to consult with a licensed loan officer to discuss their financing options. After they complete the mortgage pre-approval process, they will know your how much they qualify for, their down payment options, and what loan types they are eligible for.
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