Type of Loan
Your first choice is deciding what type of mortgage product will be suitable for you. This will take into account how much you have available for a down payment, how much income you can prove, and what you credit score is. Some products come with mortgage insurance, while others do not.
Conventional Home Loan
A conventional home loan is not government insured to protect the lender from any losses. This means that the lender has to believe that you will be able to carry your mortgage without any assistance or risk of default. A conventional loan has lower rates then it’s insured counterparts, meaning lower payments, in exchange for stricter lending criteria.
- FICO score of 620 or higher
- Down payment of 20%
- Enough income to carry your mortgage payment, in combination with any other debts, loans, or financial obligations.
- Today’s conventional interest rates vary from 3.5%, up to 4.125%
There are three government-backed programs to assist anyone that is not able to get a conventional mortgage should they not meet the minimum requirements: FHA loan, VA loan, and USDA/RHS loans.
This type of loan is insured by the Federal Housing Administration (FHA) to protect the lender from any losses or defaults. It is popular because it requires a smaller down payment, and has easier lending criteria. However there is an initial insurance premium of 1.75% of the total loan amount, combined with a monthly insurance premium of 0.85%, along with slightly higher interest rates. This means that you will be paying more on a monthly basis then you would be if you had a conventional mortgage for the same amount. However, for some this is the only option available.
- FICO score of 580 and higher for a down payment of 3.5%
- FICO score of 500 to 579 for a down payment of 10%
- Today’s FHA interest rates are around 4.5%
This type of loan is for military service members and their families, offered by the US Department of Veteran Affairs (VA), which is also guaranteed by the government. Similar to an FHA loan, if the borrower defaults the lender is protect from any losses by the VA. The biggest advantage of this program is that no down payment is required.
Must be a veteran that has served 90 consecutive days during war, 180 days during peacetimes, or 6 years in the reserves.
- You are the widow of a veteran that died while in service.
- Home must be VA approved
- FICO score of 620 or higher
- However, a lower FICO score may be accepted if you are well qualified in other areas.
- Todays VA interest rates are around 3.875% to 4.125%
This type of loan is designed for families in rural areas who are struggling financially, but meet certain income requirements. This program is managed by the Rural Housing Service (RHS), and also offers the advantage of a zero down payment. However this type of loan requires the borrower to pay mortgage insurance which will increase the monthly payments similar to an FHA loan.
- Income must not be higher then 115% of the adjusted area median income, which varies by town or county.
- Your debt must not exceed your income by more then 41%
- Minimum FICO score of 620
Finally there is an option on the size of the loan you are borrowing in contrast to the value of the home (LTV), which falls into the category of a conforming loan, or a jumbo loan.
This type of loan meets certain underwriting guidelines set out by Fannie Mae or Freddie Mac. These are corporations that are government controlled, which purchase and sell mortgage-backed securities. That means there is a certain loan to value ratio cannot be exceeded in order to be considered safe, because the same mortgage will then be sold off to real estate investors. Think of it this way: who wants to invest in a mortgage whose loan to value (LTV) ratio is at 100% or higher? If there is a crash, adjustment, or depreciation it will be virtually impossible to get your investment back, or make any reasonable rate of return. Without a reasonable rate of return, what is the point of an investment?
This type of loan exceeds the recommended loan to value ratio set out by Fannie Mae or Freddie Mac. Due to the size of the loan is can be quite risky for the lender for the reasons stated above. Therefore, applicants should have excellent credit, strong income, low debt ratio, and good savings in order to qualify.
Today’s jumbo loan rates are around 3.375% to 4.125%.
Stay tuned for a closer look at the rate variances such as fixed, variable, and blended, in our next home buyer instalment.