Demystifying Mortgage Options
What is a Mortgage?
A mortgage is a loan in which a homebuyer takes out to the pay a contracted amount of their home. A mortgage is secured by the property in which the loan was taken out for. Mortgages allow the homebuyer to pat the balance of the contract amount over time rather than paying the entire balance up front. If a homebuyer cannot pay the mortgage than the property may be taken by the financial institution in which the mortgage was through.
FHA (Federal Housing Administration)
The Federal Housing Administration is controlled by HUD (The Department of Housing and Urban Development) sets the underwriting guidelines for this type of mortgage. The key to an FHA loan is the down payment. An FHA loan allows you to buy a home with an down payment as low as 3.5% as well as allowing “gifts” to be brought into the mortgage from family. Both of these factors make an FHA loan attractive to all type of buyers.
However, mortgage insurance, an upfront premium, and monthly premium are all required and are typically financed in the mortgage as well. There are no income limits for an FHA loan but loan limits do apply.
The governmental sponsored agencies Fannie Mae and Freddie Mac define the underwriting terms for this type of mortgage. Conventional loans are very popular and make up close to 50% of the mortgage market. Typically, conventional mortgages attract those homebuyers who have good credit, those able to put down a more significant down payment, and those that were not eligible for FHA, USDA, or VA loans.
A Conventional mortgage typically requires 5% to 20% down payment, income requirements, and a good credit score. With most lenders, if you put down less than 20%, PMI (Private Mortgage Insurance) will be required and is typically financed into the mortgage amount. Conventional loans can be conforming or non-conforming in which a non-conforming loan exceeds the loan limit guidelines. The interest rate may also be fixed or variable.
VA (Veterans Administration)
- If you are a veteran of the United States, an VA loan may be the perfect loan for you. This does not only include veterans but also spouses of veterans as well. The underwriting guidelines for these loans are controlled by the veteran’s administration.
- The benefits of VA loans are you can purchase a home wih no down payment and the credit guidelines are less stringent. Also, the Veterans Administration insures the loan but does require a funding fee that is typically financed into the mortgage. A separate benefit for veterans that have a war related disability is the funding fee may be waved.
- A loan limit may apply.
USDA (Rural Development)
The RHS (Rural Housing Development Service) underneath the United States Department of Agriculture (USDA) sets the underwriting guidelines for USDA RD loans. If your home qualifies within an eligible rural area, this loan would be a great option.
- The benefits of an USDA RD loan is there is no down payment, flexible credit guidelines, no limit of purchase price, gifts from family are allowed, and fixed 30 year loans apply.
- USDA RD loans may also require an initial guarantee fee which is typically financed.