MAKING SENSE OF THE DIFFERENT MORTGAGE OPTIONS
If you’re shopping for a home, you should also be shopping for the best mortgage loan possible. But how do you know which type of mortgage is right for you? Start here!
CONVENTIONAL LOANS
Conventional mortgages are ideal for borrowers with good or excellent credit. Conventional mortgages are one of the most common types of home loans. They guideline are conservative for:
Borrower credit scores.
Minimum down payments.
Debt-to-income ratios (Percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support).
Conventional mortgages generally pose fewer hurdles than Federal Housing Administration (FHA) or Veterans Affairs (VA) mortgages, which may take longer to process. But…you’ll need excellent credit to qualify for the best interest rates.
FHA LOANS
Federal Housing Administration mortgages have flexible lending standards for:
People whose mortgage payments will be a big chunk of their take-home pay.
Borrowers with low credit scores.
Homebuyers with small down payments and refinancers with little equity.
The Federal Housing Administration does not lend money. It insures 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 typically cap debt-to-income ratios at around 45% a
nd sometimes less. For many FHA borrowers, the minimum down payment is 3.5%. And borrowers can qualify for FHA loans with credit scores of 580 and even lower. Each FHA loan has 2 mortgage insurance premiums:
An upfront premium of 1.75% of the loan amount, paid at closing.
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. 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
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. The VA does not lend money but guarantees loans made by private lenders. 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. VA borrowers can qualify for 100% financing. Veterans do not have to be first-time buyers and may reuse their benefit.
