If you are looking to take out a mortgage or getting financing for a home, you may be overwhelmed by the loan options. Learning the difference between all the loan types and trying to pick the best one for your situation can be easy if you know all the details.
Each loan has different benefits and drawbacks. According to your credit score and income, you may qualify for some loans and not others. There are four major types of loans you can check into and apply for if it seems like the right fit.
Here is a helpful chart to easily visualize the differences. We will go into more detail about each loan below.
| FHA Loan | VA Loan | Conventional | Jumbo |
| 3.5% minimum down payment | Usually, no minimum down payment | 20% down payment to avoid PMI, 3% down payment otherwise | Minimum 20% down payment |
| 580 minimum credit score | No minimum credit score | 620 minimum credit score | 700-720 minimum credit score |
| 1.75% PMI upfront, yearly fees | Funding fee upfront usually between 1.25%-3.3% | No PMI upfront, but if you put down less than 20%, monthly fees are required | No PMI required usually if you have a 20% down payment |
| More available to borrowers with high debt-to-income ratios or lower credit scores | Usually given to service members, their spouses, and veterans | Must have an excellent to good credit score to qualify | For homes with very high purchase prices and have strict lending criteria |
Now, let’s dive into each loan more in-depth to help you decide which one will work the best for you.
FHA stands for Federal Housing Administration and is therefore ensured by this administration. This doesn’t exactly mean they fund the money though. It just means they qualify lenders in case they happen to default on their mortgage. The borrower has to meet most of the criteria above and the lender has certain rules they have to meet as well.
FHA loans are usually flexible. They allow people to borrow up to 57% of their income. The minimum credit score for an FHA loan is usually 580, but down to 500 with a 10% down payment.
The minimum down payment is usually around 3.5 percent. Along with the down payment, you will also have two separate mortgage insurance premiums. One is the upfront premium of 1.75% of the loan amount you are taking out which is paid for at closing. You will also have an annual premium that will vary based on your loan amount, income, and possibly the area of the home you are buying.
A typical FHA mortgage loan is about 30 years, but it can vary based on your personal situation.
Choose an FHA loan if:
The premiums and the down payment are a little higher than other typical loans. However, the lower credit score minimum makes it more available to people. As with all loans, consider your financial situation. Just because you are offered a loan amount, doesn’t always mean you should take it.
Factor in the insurance amounts and the premiums to make sure the monthly payment is something you can comfortably afford.
Just like with FHA loans, VA loans are government-insured and backed. With VA loans though, the US Department of Veterans Affairs insures the qualified lenders. Because it is backed by the VA, you have to be an active-duty member or a veteran to qualify or apply for these loans.
In certain cases, spouses and dependents of veterans can also qualify for VA loans. Lenders and borrowers must both meet certain criteria. Unlike with many mortgages, VA loans do not require that you be a first-time buyer.
The best part about the VA loans is that there is no down payment if the purchase is your primary residence. You also don’t have to pay mortgage insurance like with other loan amounts.
VA loans do have a funding fee though. The amount can be paid separately at the beginning, or it can be combined with your loan amount for one monthly payment. It’s usually 1.24% to 3.3%.
One thing to consider is that the VA does not always guarantee the full amount of the loan. You as the borrower might have to get through additional requirements that the lender back by the VA might have. The VA amount usually varies by the county you are purchasing in so you will need to check your district’s requirements.
Choose a VA loan if:
Conventional loans are by far the most common loan available. However, you will need a good to excellent score to qualify. This makes it not ideal for some borrowers. Some financial institutions still offer conventional loans to buyers with good credit scores, so it always worth checking around for different lenders.
If you have high income and low debt ratios, you might also be able to qualify for a conventional loan from certain lenders despite having a low credit score. Credit unions and independent banks are better choices for those with lower credit scores.
People with excellent credit scores can try their personal banks. Don’t be afraid to shop around though. Some banks may offer lower interest rates and down payments than others.
Like FHA loans, a conventional loan has mortgage insurance premiums. The main difference is that if you put 20% down on the purchase price, you don’t have to pay the insurance premiums. If you can’t put down a 20% down payment, you will have to pay the premiums.
The good news is that once your balance drops below 78%, you have the option of canceling your mortgage insurance.
Choose a conventional loan if:
Jumbo loans are special loans that need to be considered if you are buying a high-cost home or property. The cap for normal loans in most counties is $548, 250. So, if you are looking at a purchase price higher than that, you need to start looking at jumbo loans.
Jumbo loans can be hard to obtain because the lenders are not protected from losses if a borrower defaults. Any lender who agrees to a jumbo loan will be taking a great risk. This is one of the reasons why they have such strict lending criteria.
Along with an excellent credit score of at least 700, lenders will also check your debt-to-income ratio. If you have large cash reserves, lenders may be flexible. If not, the debt-to-income ratio is usually capped at 45%.
Most lenders will ask you to show proof of cash reserves in the equivalent of one year of mortgage payments. You will need to show ample tax information including all your W-2s and 1099s.
Be ready to make a hefty down payment of 20%. Some lenders may negotiate to 10%, but this is not extremely common. If you get a low down payment amount, you will probably be expected to pay insurance premiums. For the normal 20% down payment or higher, insurance premiums are usually not required. The closing costs will also be higher than normal loans from the FHA or VA.
Despite the loan being large, there are still loan limits. It will depend on the county you are purchasing in. Areas that are considered high cost have a loan limit of about $822, 375. Other counties not in high-cost areas have a cap of around $548, 250.
Choose a jumbo loan if:
The type of loan you apply for and qualify for will depend on your purchase price and personal situation. Each loan has pros and cons. Consider consulting a financial advisor if you are buying a high purchase price home. Always look at different lenders when choosing a loan to see where you can get the best interest price and lowest down payments.
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