There are quite a few different types of home loans, each with their own unique features, and I’m going to touch on the five main groups and how they work.
FHA: One of the most common questions we hear is “What does FHA stand for?” Most people who are not in the industry will say something like ““First-time Homebuyer A… What does the A stand for again?”
In truth, FHA simply refers to the Federal Housing Administration. That’s it.
FHA loans are government backed loans that allow for more flexibility in a few of the key factors that accompany the pricing of the loan. The biggest appeal for this type of mortgage is that the rate is often lower than a conventional loan, which can be useful if you have credit challenges.
The interest rate and mortgage insurance rate are not on the same sliding scale as that of a conventional mortgage, which makes it more affordable for borrowers with a lower credit score.
If you have a credit score of 580 or higher, 3.5 percent is the minimum down payment amount for an FHA loan. If your credit score is between 500 and 579, that changes to 10 percent of the total purchase price.
Some additional requirements for FHA loans include:
- Up front mortgage insurance (aka “UFMIP”) is required (with 1.75% of the initial loan amount added back into the loan)
- The monthly mortgage insurance (aka “MIP”) is permanent to the loan
- The mortgage insurance factor is a set number and not on a sliding scale like conventional loans are (MIP Factor = .85% of the loan amount divided by 12)
Conventional: Conventional loans are the most common type of mortgage and are originated and serviced by a variety of companies. With this type of loan, the actual note (who owns the debt) is usually held by Freddie Mac or Fannie Mae.
Now, you might be saying…”20% is the minimum down payment, right?”
Nope! As a first-time home buyer, you can take advantage of as little as a 3% down payment on a loan amount up to $510,000 (and 5% from there line up to $765K, depending on the county you are purchasing in).
One important thing to keep in mind is that if you are not putting at least 20% down, you will be required to pay mortgage insurance (see additional information on mortgage insurance below).
The biggest difference between an FHA loan and a conventional loan is that the monthly mortgage insurance is removable after a certain point, and you’ll be glad to know that it’s relatively easy to have it removed. There are a few key points that need to be met to do that, so you’ll want to contact your servicer (whoever you make the payments to) in order to discuss your options.
VA Loan: First, to all veterans, thank you for your service to our country. We appreciate your sacrifice and know that homeownership is one of the most important ways for our veterans to build their lives, families, and community.
VA loans are one of the primary benefits provided to those who serve. This type of loan can be a little more complicated than FHA and conventional, so first and foremost we recommend you work with a loan officer that is well versed in how the product works.
Here’s a basic outline of what to expect:
- To start, you’ll acquire a Certificate of Eligibility (COE) from the VA to determine what you qualify for, and if you will need to pay the VA funding fee to start the process
- Once you’ve established your eligibility, you’ll be able to start the process of purchasing a home with 0% down payment
- There are still closing costs and money that need to be available to set up your impound account, so be prepared for that
- Monthly mortgage insurance is not required, you’ll have access to lower interest rates than conventional (in most cases), and there are very flexible underwriting requirements.
Note: If anyone tries to tell you a VA loan is too hard of a loan product to work with, you are talking to the wrong people! An experienced loan officer can answer any of your questions and navigate smoothly.
USDA Loan: Hold on a second, are we talking steaks or home loans? Apologies for the silly joke, mortgage humor is a rare thing so we work with what we’ve got=)
All jokes aside, USDA loans are available for rural communities. This type of mortgage does allow for a 0% down payment option with few mortgage insurance requirements, however there are pretty strict income restrictions and it is only available in select markets.
Jumbo Loan (AKA Non-Conforming AKA Portfolio Loan): You might have heard of these as “non-conforming” or “portfolio” loans. Here’s what you need to know…
Each county in the United States has a loan limit associated with it that’s based on the median home price in that area. As an example, $765,600 is the high balance loan limit in the majority of the San Francisco Bay Area.
Anything over that amount is considered a Jumbo loan. These loans are issued directly by financial institutions, which happens when you’re seeking a loan that’s over the county high balance loan limit.
These typically have more restrictions from an underwriting standpoint than with a conventional loan due to the extra risk an institution takes on by lending their own assets. A couple of examples of restrictions would be higher credit scores and reserve requirements. Usually, the bank will require proof of funds on hand equal to 6-12 months of the monthly payments after the amount for down payment and closing costs are subtracted.
Non-QM (formerly known as Sub-Prime): This is where it gets even more interesting. QM stands for “Qualified Mortgage” which is a term that came about from the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010.
This type of loan provides more flexibility for those of us who can’t color between the lines. A couple of examples below.
- Bank Statement loans – For self-employed borrowers that don’t show a lot of income via tax returns. In this case, you can establish income by adding up all the deposits into a business account and dividing over that specified time period.
- Investor Cash Flow program – You can qualify based only on the future income of the new income producing property you are purchasing.
These types of loans also have additional restrictions similar to jumbo loans. The lending institution will likely need higher credit scores, larger down payments, and reserve requirements must be met.