Loan Options

Exploring the world of home loans reveals a variety loan options, each tailored to fit diverse financial situations, goals, and preferences. From conventional loans favored for their straightforward terms to government-backed options like FHA, VA, and USDA loans designed to assist specific groups of homebuyers, the variety is vast. These loans differ not only in terms of eligibility criteria, such as credit scores and down payment requirements, but also in the upfront costs involved, like earnest money, underwriting fees mortgage insurance premiums.

Conventional Loan

Conventional loans are mortgages that are not backed by a government agency like the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA). They are offered by private lenders such as banks, credit unions, and mortgage companies.

Conventional loans are a common choice for homebuyers with good credit and stable income who can make a larger down payment. They offer flexibility in terms and loan amounts and are available to any qualified borrower.

Conforming vs. Non-Conforming Conventional Loans

Conforming: Loans that meet the standards set by Fannie Mae and Freddie Mac, including loan limits, down payment requirements, and debt-to-income ratio standards.

Non-Conforming: Loans that do not meet Fannie Mae and Freddie Mac standards (Jumbo loans or loans with unconventional terms).

  • Conventional loans usually require a down payment of at least 3% to 20% of the home's purchase price. If you pay less than 20% down, you might need to pay private mortgage insurance (PMI).

  • Conventional loans typically require higher credit scores compared to government-backed loans. A good credit score is often necessary to qualify.

  • Private Mortgage Insurance (PMI) is typically required for down payments less than 20%.

  • Conventional loans offer various loan terms, such as 15-year or 30-year fixed-rate mortgages, giving borrowers options depending on their financial goals.

  • Interest rates on conventional loans are usually determined by the borrower's credit score and other factors, such as the size of the down payment.

  • Fixed-Rate Mortgages: The interest rate remains constant throughout the life of the loan.

    Common Terms: Typically offered in terms of 15, 20, or 30 years.

    Advantages: Predictable monthly payments and stability.

    Adjustable-Rate Mortgages (ARM): The interest rate is fixed for an initial period (e.g., 5, 7, or 10 years) and then adjusts periodically based on market conditions.

    Common ARMs: 5/1 ARM, 7/1 ARM, 10/1 ARM (where the first number represents the fixed-rate period, and the second number represents how often the rate can adjust).

    Advantages: Often start with a lower initial interest rate compared to fixed-rate loans.

    Jumbo Loans: Loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac.

    Loan Limits: Vary by area; typically more expensive real estate markets have higher limits.

    Advantages: Can finance higher-priced properties.

    Interest-Only Loans: Loans where borrowers only pay interest for a certain period (e.g., 5-10 years), after which the loan converts to a regular amortizing loan.

    Advantages: Lower initial monthly payments.

    Balloon Mortgages: Loans with fixed-rate terms for a certain period (e.g., 5-7 years) followed by a lump sum payment of the remaining balance.

    Advantages: Can offer lower interest rates initially.

    Portfolio Loans: Loans held in the lender's portfolio instead of being sold to the secondary market.

    Advantages: Can offer more flexible underwriting standards and terms.

FHA Loan

FHA loan is a mortgage backed by the Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD).

FHA Loans are a popular choice for first-time homebuyers and those with limited down payment funds or lower credit scores.

  • FHA loans require a down payment as low as 3.5% of the home's purchase price, making homeownership more accessible for many people.

  • Borrowers with lower credit scores can qualify for an FHA loan. Typically, a credit score of 580 or higher is needed to qualify for the 3.5% down payment. With a lower score (500-579), a 10% down payment is required.

  • Borrowers must pay an upfront mortgage insurance premium (MIP) at closing and monthly MIP as part of their mortgage payments. This insurance protects the lender in case the borrower defaults on the loan.

  • FHA loans have maximum loan limits that vary by location, which means there is a cap on the amount you can borrow.

    FHA loans are assumable, meaning that if you decide to sell your home, the buyer can take over your FHA loan if they qualify.

VA LOAN

A VA home loan is a mortgage that is guaranteed by the U.S. Department of Veterans Affairs (VA) and is available to eligible veterans, active-duty service members, and some members of the National Guard and Reserve.

VA loans provide an opportunity for eligible service members and veterans to access affordable home financing options and achieve homeownership more easily.

VA Funding Fee Options

Financing Fee: The funding fee can often be rolled into the loan amount, so the borrower doesn't have to pay it out of pocket at closing.

Exemptions: Some borrowers may be exempt from the VA funding fee, such as veterans with service-related disabilities or surviving spouses of veterans who died in service or from a service-related disability.

  • No Down Payment. One of the biggest advantages of a VA loan is that qualified borrowers can purchase a home with no down payment.

  • Reserved for veterans and active-duty service members.

    Flexible Credit Requirements: VA loans tend to have more flexible credit score requirements, making it easier for some borrowers to qualify.

  • Lower Interest Rates: VA loans often have lower interest rates compared to other loan types.

    Closing Cost Limitations: There are limits on the amount of closing costs that the borrower can be charged, which can help reduce out-of-pocket expenses.

    Loan Assumability: VA loans are assumable, which means that if you sell your home, the buyer can take over your existing loan if they meet VA eligibility requirements.

  • No Private Mortgage Insurance (PMI): Unlike many other loans, VA loans do not require borrowers to pay for private mortgage insurance.

  • The VA funding fee is a one-time fee that most borrowers pay when obtaining a VA home loan. The fee helps support the VA loan program and allows it to offer favorable terms such as no down payment and no private mortgage insurance (PMI). The amount of the funding fee varies based on several factors, including the type of service, whether it is a first-time or subsequent use of the VA loan benefit, and the size of the down payment.

    Here is a general breakdown of the VA funding fee rates for different types of borrowers and loan types:

    For Purchase Loans:

    • First-Time Use:

      • 0% Down Payment: 2.15% of the loan amount.

      • 5% to less than 10% Down Payment: 1.50% of the loan amount.

      • 10% or More Down Payment: 1.25% of the loan amount.

    • Subsequent Use:

      • 0% Down Payment: 3.3% of the loan amount.

      • 5% to less than 10% Down Payment: 1.50% of the loan amount.

      • 10% or More Down Payment: 1.25% of the loan amount.

    The VA funding fee is just one aspect of the overall cost of obtaining a VA home loan. Borrowers should also consider other fees and expenses involved in the homebuying process.

USDA LOAN

A USDA home loan is a mortgage backed by the United States Department of Agriculture (USDA) that is designed to help low- to moderate-income families buy homes in rural and suburban areas.

USDA home loans provide an opportunity for eligible families to buy a home with little to no down payment, making homeownership more accessible in rural and suburban areas.

  • No Down Payment. One of the biggest benefits of a USDA loan is that eligible borrowers can purchase a home with no down payment.

  • Borrowers pay an upfront guarantee fee and an annual fee, similar to private mortgage insurance, but often at lower rates.

  • Property Location: The home being purchased must be in a USDA-designated rural or suburban area to be eligible for the loan.

    Income Limits: To qualify, borrowers must meet income limits, which vary depending on the area. Generally, the income must be below a certain percentage of the area's median income.

    Credit Flexibility: USDA loans have flexible credit requirements, allowing more people to qualify.

  • Low Interest Rates: USDA loans typically offer competitive interest rates, making them an affordable option.

DSCR LOAN

A DSCR mortgage, or Debt Service Coverage Ratio mortgage, is a type of loan typically used by real estate investors to finance properties. Instead of focusing on the borrower's personal income and credit score, this loan is based on the income the property will generate.

DSCR mortgages provide an option for real estate investors to finance properties based on the income the property will generate, rather than the borrower's personal financial situation.

  • Property Income Based: The loan approval is based on the property's ability to generate income rather than the borrower's income or credit.

    Flexible Qualification: Since the loan is based on the property's income, it can be easier for real estate investors who may not have traditional income sources or high credit scores to qualify.

  • Private Mortgage Insurance (PMI) is typically required.

  • Debt Service Coverage Ratio: This ratio measures the property's income relative to the mortgage payment. A higher DSCR indicates a safer investment and is more favorable for the borrower.

    Loan-to-Value Ratios: These loans may have different loan-to-value (LTV) ratio requirements compared to traditional mortgages, often around 80% or lower.