What type of loan is right for you?
Which one is best? It depends on your situation.
Conventional, FHA, VA, or USDA
There are four basic types of financing for purchasing a home, and there are several factors in determining which loan is best for your situation. Special contributor Mandy Nolen of Statewide Mortgage explains each loan below.
Conventional
Conventional loans are not insured by the government and typically need at least 5% down payment. Anything less than 20% will require mortgage insurance, but with strong credit the cost is lower and can be eliminated over time.
Ideal for borrowers who:
Have good to excellent credit, lower debt ratios and strong assets.
FHA
FHA loans are insured by the Federal Housing Administration and have more liberal qualifying guidelines than other loan types. You will need a minimum of 3.5% down, and these funds can be gifted by family member.
Ideal for borrowers who:
First time homebuyers, low-to-moderate income borrowers with lower-to-good credit, higher debt ratios and lower cash reserves.
VA
VA loans are loans specifically designed for active-duty and military veterans and are insured by the US Department of Veterans Affairs. For most borrowers, they don’t require a down payment. The upfront funding fee can be financed into the loan and no monthly mortgage insurance is required.
Ideal for borrowers who:
Veterans, actively serving military personnel and surviving spouses of veterans with low-to-good credit, low-to-high debt ratios and a documented Certificate of Eligibility.
USDA
USDA loans are zero down payment mortgages offered to rural property owners (the definition of rural may be more flexible than you think). USDA loans are issued through the United States Department of Agriculture. Income and property restrictions apply.
Ideal for borrowers who:
First time homebuyers, rural homebuyers, low-to-moderate income borrowers with mid-to-good credit and lower debt ratios.
What is the minimum credit score?
This varies by loan program and lender. The technical answer to this infamous question is 580 (for an FHA loan), however remember, lenders never look at credit scores in a vacuum. With a credit score as low as 580, there would need to be positive factors in place to help compensate for a lower score. Lenders look at overall credit profile, payment history, debts, income, employment history, demonstrated ability to save through cash reserves, etc. The stronger you are in some of these areas, the more likely you are to get approval with that type of credit score. It’s always important to have a loan officer look at the bigger picture and not minimize you to a credit score. This also underscores the importance of finding a loan officer who will partner with the buyer to create a plan of action, even if the client is “not ready yet”.
Confused? That’s okay! Help is available to assist you in further understanding the pros and cons of each. Thank you Mandy for your expertise!