Understanding different Mortgage Loan Types is crucial when financing a home. Some of the main home loan options are Conventional, FHA, Jumbo, VA, and USDA loans. Some lenders also offer Stated Income Mortgages. These loan types are different and it’s important to understand their difference. In some cases, borrowers qualify for more than one loan type. To make a right choice they need to be consulted properly to choose one that fits their goals the most. Let’s inspect them more closely.
Conventional (Administered by Fannie, Freddie) loans have higher loan limits than FHA but come at slightly higher interest rates. They generally require a 5% minimum down payment. Generally, if a loan amount is higher than 80% of the lower of appraised or purchased price, you’ll get a Mortgage Insurance. With Conventional Loans, mortgage insurance has a maturity date. If your mortgage meets all the conditions, there is a good chance the bank will remove it from the mortgage. Credit Score is the major driving factor for Mortgage Insurance cost. MI for Conventional Loans oftentimes will end up costing much less than that of FHA loans. Compared to FHA loans, conventional loans have a higher FICO score requirement and have a higher income (lower debt) requirement. You shouldn’t think of one home loan option as “better” or “worse” than the other. They are different and it’s important to seek guidance from professional mortgage brokers to choose what fits your financial goals.
ARM (Adjustable Rate Mortgages) or sometimes called variable rate mortgages come in various terms. There are 5/1, 7/1 and 10/1 ARM loans. 5/1 ARM loan means the rate will remain fixed and fully amortizable during the first five years of the loan. They call this period the adjustment period. Then the interest rate will start adjusting. Rates will adjust based on an index which reflects the cost to the lender to borrow from the credit markets. ARMs become more popular in a market where interest rates raise as they have often lower rates than fixed mortgages. Conventional, FHA and VA loans offer ARM options. Consult a professional mortgage broker or a loan officer to extract as much information as possible. Maybe a shorter fixed rate mortgage is more beneficial for you versus a loan fixed for the full term?
FHA (Federal Housing Administration) loans as stated above have more forgiving credit score requirements and have lower rates. They come with a UFMIP (Up-Front Mortgage Insurance Premium) which currently is at 1.75% HUD charges for insuring your mortgage. It is a one-time fee, which borrowers often end up rolling into their loan. FHA loans also have a monthly mortgage insurance that is usually there for the life of the loan. For those borrowers that qualify for both Conventional and FHA Mortgages, it is best to compare payments side by side. Sometimes choosing Conventional over FHA is more prudent since the Mortgage Insurance will drop in six to seven years. With FHA loans it’ll be there for the life of the loan. FHA loans have a higher Debt-to-Income Ratio, meaning you can buy more home with less income compared to Conventional loans. FHA loans are for primary occupancy only.
VA (Veterans Affairs) loans is another type of mortgage backed by the government and can be attractive for some. A Certificate of Eligibility is required. VA Mortgages are currently the only zero down payment (100% LTV/CLTV) loans on the market. VA loans are for primary occupancy only.
USDA (United States Department od Agriculture and Rural Development) loans were created to develop rural areas. They are like FHA loans with more forgiving income limits. Qualifying income for USDA loans cannot exceed 115% of area median income, which you can find on the USDA website. USDA designed these loans by definition and purpose to be near metropolitan areas although they have specific geographic area restrictions. Consult a professional mortgage broker to find out if your income fits within the area median income. Also to find out if the house you’re favoring is qualified in geographic limits of USDA loans.
It is also worthy of touching upon Stated Income Loans. Some smaller, private lenders offer Stated Income Mortgages to Self Employed borrowers. These loans carry a higher risk since income isn’t fully verified through traditional methods. i.e. tax returns or employer verifications or pay stubs. Stated Income loans come in various options, such as fully stated (no income proof provided) or bank statement programs. Aforementioned use personal and business bank statement deposits to gauge the individual’s income. Depending on documentation provided these loans could be provided for Primary as well as investment homes. The main purpose of such loans is to finance an income producing rental property. In essence the home will pay for itself, and borrower’s income won’t play a large role.