WHAT IS A CONVENTIONAL LOAN?
Conventional loans are mortgage loans offered by non-government sponsored lenders. A conventional, or conforming, mortgage adheres to the guidelines set by Fannie Mae and Freddie Mac. It may have either a fixed or adjustable rate.
Conventional mortgages are often the preferred choice for borrowers who have excellent credit and a down payment of at least 20 percent as they do not require mortgage insurance below 80% loan to value. These loans can be used to buy a primary home, second home or investment property, unlike FHA or VA loans, which may only be used for a primary home.
Conventional loan guidelines require borrowers to have a minimum middle FICO score of 620 for approval.
It’s a common belief that 20% down is needed to meet conventional loan down payment requirements, and that’s no longer the case. In reality, the conventional mortgage down payment amount can be as low as 3% for qualified applicants.
In most areas of the country the conventional loan limit is $548,250 although there are some high cost areas where that number is higher.
WHAT IS AN FHA LOAN?
A FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan. The mortgage insurance allows the borrower to put less money down and gives the lender more flexibility with their credit requirements and underwriting guidelines. FHA loans are an attractive option, especially for first-time homeowners because they are insured by the Federal Housing Administration (FHA). Primarily, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments. Typically the borrower can be approved with 3.5% down vs 20% that is required on other loan programs.
Down payments can be as low as 3.5% of the purchase price. The program also allows for more flexible underwriting guidelines and lower credit score requirements then conventional loans. Gift funds from eligible sources are also allowed for 100% of the down payment required. Another great benefit is sellers may contribute up to 6% towards the buyers closing costs which, in some cases, reduces the required cash to close from the borrower to just the down payment of 3.5%.
Minimum credit scores for FHA loans depend on the type of loan the borrower needs. To get a mortgage with a down payment as low as 3.5 percent, the borrower needs a credit score of 580 or higher.Those with credit scores between 500 and 579 must make down payments of at least 10 percent. For borrowers with no credit or limited credit a non-traditional credit file may be created.
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WHAT IS A JUMBO LOAN?
Jumbo Loans exceed the maximum loan amounts established by Fannie Mae and Freddie Mac conventional loan limits of $548,250.
Most people that buy homes will obtain some form of financing to do so. A jumbo loan allows a borrower to finance more expensive homes without having to drain their savings. It also enable borrowers to get financing using one loan with a fixed rate instead of a “piggyback” loan utilizing two mortgages to make up the amount. Often times the second mortgage can come with an adjustable rate.
A down payment of at least 10% is normally required as well as better than average credit. Income used to qualify must be documented and many lenders require the borrower to have money left over (reserves) after the loan closes.
WHAT IS A VA LOAN?
A VA Loan is Designed to offer long-term financing to veterans. VA mortgage loans are issued by federally qualified lenders and are guaranteed by the U.S. Veterans Administration. The VA determines eligibility and issues a certificate to qualifying applicants to submit to their mortgage lender of choice. It is generally easier to qualify for a VA loan than conventional loans.
VA home loans can be used to:
- Buy a home, a condominium unit in a VA-approved project
- Build a home
- Simultaneously purchase and improve a home
- Improve a home by installing energy-related features or making energy efficient improvements
- Buy a manufactured home and/or lot
- To refinance an existing VA-guaranteed or direct loan for the purpose of a lower interest rate
- To refinance an existing mortgage loan or other indebtedness secured by a lien of record on a residence owned and occupied by the veteran as a home. This is sometimes known as an IRRRL
VA Loans often require little or no down payment and do not require monthly mortgage insurance which allows the veteran to buy a home with a minimum investment.
You must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan. The home must be for your own personal occupancy.
VA does not set a cap on how much you can borrow to finance your home. However, there are limits on the amount of liability VA can assume, which usually affects the amount of money an institution will lend you. The loan limits are the amount a qualified Veteran with full entitlement may be able to borrow without making a down payment. These loan limits vary by county, since the value of a house depends in part on its location.
The basic entitlement available to each eligible Veteran is $36,000. Lenders will generally loan up to 4 times a Veteran’s available entitlement without a down payment, provided the Veteran is income and credit qualified and the property appraises for the asking price.
WHAT IS A USDA LOAN?
USDA loans are zero down payment mortgages for rural and suburban home buyers. Income limits to quality for a USDA loan do apply and depend on location.