Homebuyers have many options when buying a home today. Most don’t need the typical 20% down payment or perfect credit. We have many mortgage loan programs to help you become a homeowner sooner than you thought possible.
Conventional, FHA, USDA, and VA loans are the most common loan programs available today. Here’s how they work.
Conventional loans are non-government backed loans. They are owned by Fannie Mae or Freddie Mac and are the loans most people assume require a 20% down payment. Today, they don’t.
Here’s how to qualify:
- Minimum 660+ credit score
- Minimum down payment of 3% for first-time homebuyers
- Minimum down payment of 5% for subsequent homebuyers
- Maximum 36% total debt ratio (your total debts shouldn’t exceed 36% of your monthly income before taxes)
- Proof of stable income and employment for the last 2 years
Conventional loans are great for first-time or subsequent homebuyers. First-time homebuyers can put just 3% down, but subsequent homebuyers need 5% down. If you make less than a 20% down payment, you’ll pay PMI, but only until you owe less than 80% of the home’s value.
FHA loans are a government-backed loan. The FHA doesn’t underwrite or fund the loans, but they guarantee them for FHA-approved lenders. Because of the guarantee, which pays lenders back of borrowers default, FHA loans have flexible guidelines.
Here’s how to qualify:
- Minimum 580 credit score
- Minimum down payment of 3.5% for all borrowers
- Possibility of qualifying with a 500 – 579 score with 10% down
- Maximum 43% total debt ratio (your total debts shouldn’t exceed 43% of your monthly income before taxes)
- Proof of stable income and employment for the last two years
- Proof you’ll occupy the property year-round
FHA loans are great for first-time and subsequent homebuyers. The flexible guidelines make it easier to get funding when you have less-than-perfect credit or after coming out of bankruptcy or foreclosure.
FHA loans require an upfront mortgage insurance premium of 1.75% of the loan amount and ongoing annual mortgage insurance equal to 0.85% of the outstanding principal (paid monthly).
USDA loans are another government-backed loan, but for a specific set of borrowers. If your household income is less than or equal to 115% of the median income for the area AND you buy a home in a rural area according to the USDA guidelines, you may be eligible.
The USDA has flexible guidelines too including:
- Minimum 640 credit score
- No down payment required
- Maximum 41% total debt ratio (your total debts shouldn’t exceed 43% of your monthly income before taxes)
- Proof of stable income and employment for the last 2 years
- Proof you’ll occupy the property year-round
USDA loans are meant for low to moderate-income borrowers who don’t qualify for any other loan program. The lack of need for a down payment helps many first-time buyers own a home. But know that USDA loans have mortgage insurance for the life of the loan. Borrowers pay a 1% upfront funding fee and an additional 0.35% of the average principal balance yearly (on a monthly basis).
VA loans are the final government-backed loan, but only for veterans (or spouses of veterans who died in the line of duty). VA loans have the most flexible guidelines, helping veterans and their families buy a home.
Veterans are eligible once they serve 181 days in the military and have a discharge that’s anything but dishonorable.
The VA guidelines are flexible including:
- Minimum 620 credit score
- No down payment required
- Maximum 43% – 50% debt ratio (your total debts shouldn’t exceed 43% – 50% of your monthly income before taxes)
- Proof of stable income and employment for the last 2 years
- Proof you’ll occupy the property year-round
Like the other government-backed loans, VA loans have an upfront funding fee, which is 2.3% of the loan amount for most borrowers. However, unlike the other government-backed loans, VA loans don’t require monthly mortgage insurance even with no down payment.
Understanding all of your options when looking at mortgage loan programs is important. Look at the requirements, including the down payment requirements, interest rates, fees, and cost of the mortgage insurance.
Weigh the pros and cons of each option you’re eligible for and make the most out of your home buying options. If you need help choosing a mortgage loan program, we are happy to help you find the program that’s right for you.
