Quick Reference Guide to Mortgages

Getting a mortgage is an essential step toward homeownership. Most people need to take out a mortgage to finance their new home. The main purpose of a mortgage is to help you purchase a home that you may not be able to afford upfront. By spreading out the cost of the home over time, you can make manageable monthly payments that fit within your budget. This means that if you can't make your home loan payments, the lender can seize your property and sell it to recover the money you owe them.

In this article, we will go over some of the most common types of home loans, including the VA loan, FHA loan, and Conventional loan

VA LOAN

VA loans are a type of mortgage loan that is guaranteed by the U.S. Department of Veterans Affairs (VA). They're designed to make homeownership more accessible to veterans and service members. The VA will pay the lender back if the borrower defaults on their loan, decreasing the risk for lenders

Qualifications:

More specific qualifications can be discussed with a lender or at https://www.va.gov/housing-assistance/home-loans/eligibility/. As a start, the borrower has to be a retired veteran or active military veteran

Conditions:

The home conditions are relatively similar to most other mortgage programs

• The home is habitable as is, without extensive work necessary to make it habitable

• An appraisal is done to estimate the price range and look at health and safety hazards

• Overall, the health and safety of the home matter the most, which is why appraisers look for visible damage and livability

BENEFITS:

• More forgiving of low credit scores

• No PMI

• No down payment

• very competitive rates for veterans

Drawbacks:

• Can only have one VA loan at a time to purchase a primary residence

• Cannot buy strictly investment properties

  • must plan on living in the house bought with a VA loan

FHA LOAN

FHA loans are a type of mortgage loan that is backed by the Federal Housing Administration (FHA). This means that if you default on your loan, the FHA will pay the lender back, reducing the lender's risk and making it easier for them to lend to you. They're designed to make homeownership more accessible to people who may not be able to afford a conventional mortgage, which will be discussed later in the article.

FHA-approved lenders typically have to follow a set of rules or guidelines to see who qualifies, but as long as the buyer profile meets the criteria, they can get approved.

conditions:

• Single-family or multi-family homes

• Most stringent home conditions

• One common pet peeve: peeling paint

• The overall condition of the home is habitable

BENEFITS:

• minimum down payment of 3.5%

• monthly PMI has lowered to be competitive with other mortgage programs

• debt-to-income of 55% or lower

  • allows people to qualify for more money to buy more homes

• Interest rates are better than most other mortgage programs

• Not as concerned about credit scores

  • 660-700 still has good rates

Drawbacks:

• Have PMI for the life of the loan

  • Most people refinance once a home reaches 20% in equity to a conventional loan

• Can only have one FHA loan at a time to purchase a primary residence

CONVENTIONAL LOAN

These are the most common type of mortgage loans and are not backed by the government. Instead, they are funded by private lenders like banks, credit unions, or mortgage companies. Lenders take more risks, but there is more flexibility with the eligibility requirements and interest rates. Conventional loans are typically backed by Freddie May or Freddie Mac, which help provide safety for lenders.

Qualifications:

• 5% or greater down payment on the home

• debt-to-income of 45% or lower

• Higher credit score, where lower scores hurt you

  • Over 700 or better

BENEFITS:

• PMI is lower than FHA and will go away at 20% equity

• Can get more than one conventional loan for any home

First-time Buyers Program

Within conventional loans, there are many different programs with varying qualifications. There are a few first-time buyers programs, and some examples are Home Ready and Home Possible. This has a 3% loan down payment and can have income restrictions based on the county that you are buying in.

DISCLOSURE:

There are various loan products and programs that this article is not able to cover. This is meant to cover some of the most common loan programs available. We are not mortgage professionals, but if you would like to talk to one, we are happy to recommend someone who best fits your needs.

The blog was written by: Erika Lam