What are the different loan types available?
What are the different loan types available?
When you start the homebuying process, one of the most important questions you will be asked by a realtor is, “Are you pre-approved?” Your pre-approval is going to be one of the most important pieces of buying a home, as more often than not, you don’t have the cash laying around to purchase the home outright. This is where financing your home in the form of a mortgage comes in.
There are a multitude of different mortgages out there, and I wanted to take a second and help you work through the basics of the main types of loans that you will see. Generally, the preferred mortgage is a Conventional mortgage, but you may not fit in the perfect box of “everyone,” which is why it is so important to speak with a mortgage professional to determine your best options.
Keep in mind as you read through this, that these are going to be a general understanding of each loan type, and there is also a strong potential that you can qualify for multiple loan types. Sometimes, one loan can save you more money than another loan or get you a better pre-approval amount. Other times, we may have to use a special program that would fit your specific needs. Again, I cannot stress this enough: talk to your mortgage professionals here at Stockton Mortgage to work with you through the process. For the purpose of ease throughout the article, I will solely focus on a Fixed Rate Mortgage.
A Fixed Rate Mortgage is the most common mortgage that you see on the market. Simply put, a fixed rate mortgage has an interest rate that stays the same throughout the life of the loan. Different term lengths, or the amount of time that you pay on the mortgage, have different interest rates, which combine with your credit score and the loan amount to determine your interest rate. Your interest rate never changes throughout the life of a fixed rate mortgage. I will also be talking about different debt to income ratios as well as Private Mortgage Insurance, or PMI.
As I had previously mentioned, the preferred mortgage is a Conventional Fixed Rate Mortgage. The reason that a Conventional mortgage is the preferred mortgage is that the appraisal process (measuring how much the home is worth by a licensed appraiser) has less strict standards as far as the condition of the house, however, it does have to be a livable home. They have a wide range of uses from a primary residence, investment properties, second homes, and more.
The typical maximum debt-to-income ratio for a conventional mortgage is 45% for your entire monthly debt profile, and 36% for your housing debt profile. Furthermore, Conventional Mortgages are more easily qualifiable as a borrower if you have a higher credit score. The higher your credit score, the more likely you are to get favorable approval odds on your Conventional loan. Given certain circumstances, your approval rating can go upwards of a 50% debt-to-income ratio. They tend to close faster as well as provide the seller the confidence that you are a very qualified buyer.
A conventional mortgage requires 3% of the home price for a down payment if you are a first-time homebuyer, or if you haven’t owned a home in more than 3 years; this mortgage requires 5% for a down payment if you have owned a home during that time.
Myth: you do not have to put 20% of the purchase price for a down payment to get a Conventional Mortgage. However, if you do not put 20% for a down payment, you will pay PMI, or Private Mortgage Insurance.
An FHA Mortgage is another common mortgage used widely. Great for first time homebuyers without much credit history, FHA loans will typically allow for lower credit scores and a higher debt-to-income calculation. Although this isn’t always true, and it varies from situation to situation, it is more than likely. FHA appraisals are a little stricter than a conventional appraisal.
For instance, one of the biggest, most common issues that we see when doing FHA appraisals are chipping paint on the interior, exterior, and all the trim on the house. The same goes for any outbuildings that the home has such as sheds, barns, and detached garages. Your realtor will typically have a great idea of whether a home will pass an FHA appraisal or not, and what types of remediation we may be able to do prior to the inspection to get it to pass. FHA loans can only be used for primary residences. An FHA loan does require a 3.5% down payment and carries PMI for the life of the loan if you put less than 10% for a down payment. FHA loans also require what is called “upfront mortgage insurance,” required by the Federal Housing Administration that helps guarantee the loan in case of default (not paying back the loan).
If you are looking to live outside of the city, and see a little more of the country, a USDA Rural Development Mortgage may be the option for you. Requiring 0% for a down payment, they are also great for people that haven’t quite saved up enough money to cover both the down payment and closing costs. Rural Development loans, or RD loans, do have both income restrictions and location restrictions. You can check those here: Location Eligibility and Income Eligibility. You must be at or below 80% of the area median income to qualify for a Rural Development loan.
Rural Development loans do require the mortgage insurance, but at a lower rate than what an FHA loan would require. They do have a set percentage that you pay, but it will always be less than an FHA loan and is based on the original loan amount of the house. The PMI for an RD loan will never cease to be paid, unless you refinance your home at a later date out of an RD loan.
The USDA Rural Development program has put stricter standards of debt to income ratios on these loans, so your housing payment must be at or below 29% of your income, and your total monthly payment debt must be below 41% of your income. There are circumstances, called compensating factors, that will allow you to go up to 34% for your housing debt profile, and 46% of your total debt profile. Again, it is best to consult with a mortgage professional to determine what works for you!
Veterans and surviving spouses have a wonderful opportunity presented to them through the Veteran’s Affairs department. A VA Mortgage allows for veterans and surviving spouses to obtain a loan with higher debt to income limits, lower credit scores, and lower interest rates than your typical conventional mortgage. Please note: you must be an active duty, veteran, or surviving spouse of the United States Armed Forces to receive this loan.
The VA has set standards on the amount of eligibility you receive to purchase a home. The only way to truly know how much eligibility you can receive is by getting a Certificate of Eligibility through your local VA. We are also able to order a Certificate of Eligibility if you can provide us with your DD-214 or proof of active-duty military service. With VA loans, the maximum debt to income ratios that are typically used stay under 41%, however, often we see these profiles that can go upwards of 50%, and sometimes even higher given the right circumstances. Also, VA loans do not require PMI. How great is that? They do however base a funding fee, basically the cost of getting a loan with the VA, which is determined depending on what your certificate of eligibility states.
We are starting to see a slight uptick in Renovation Loans as well. These are a great option for people who are not a DIY type-of-person but want to buy a fixer upper and refinish a home to their liking. Renovation loans have a lot of ins and outs to them, that don’t make a ton of sense to go in detail about for the purpose of this article, but they do require a bit more work in getting the mortgage to start. The 2 main types of renovation loans are a conventional Homestyle Renovation Loan, offered through Fannie Mae, or an FHA 203(k) Renovation Loan. These both give you the opportunity to renovate a new or existing home and allowing you to finance those renovations up front. The loan-to-value calculation takes the proposed future value of the home into account when doing the loan, giving you more purchasing power and more options to make the home yours.
Occasionally, we run into a more unique loan situation. This is where there are options considered “Non-Conforming Loans,” as they don’t conform to the previous four loan types. Some lenders have special programs specifically for non-conforming loans, and these are also often referred to as a “Portfolio Loan.” Portfolio loans are a little more unique in the fact that they don’t have the same requirements as these other loans, and each one is unique.
One common portfolio loan is a resident doctor loan, which allows for higher loan limits and lower down payment limits. For instance, these are often created for doctors that just received their residency, but due to all their schooling, may not have been able to save up as much money as you would typically need to buy a home in their situation.
As you can see, every loan is different. Often, you can qualify for multiple types of loans as well, and it is important to have a great working relationship with not only your realtor, but also your lender. It is very important that you build a team that fits your wants, goals, and financial needs, to help you better succeed in an ever-changing market. Here at Stockton Mortgage, we want to give you the power to succeed and confidence to grow your knowledge in today’s market. If you ever have questions, we don’t work your typical 9-5 hours, and we would be more than happy to help you out! Give us a call today to start!