The BIG 4 Home Loans - Simplified!
Updated: Dec 2, 2021
Conventional mortgages are loans the US government does not insure, and they are the most common loans used in the mortgage industry.
The two types of conventional loans are conforming and non-conforming.
Conforming loans are below a maximum loan amount set by the federal government, whereas non-conforming loans are above that maximum. A non-conforming loan (or - jumbo loan) would be used in more expensive neighborhoods, and the purchaser would need to meet higher qualifications to gain approval (i.e., income, credit score, assets, etc.).
Conventional loans can be granted with as little as a 3% down payment on a primary, secondary, or investment property. If you are putting down less than 20%, you will likely need to pay for private mortgage insurance, but the good news is that you can request to cancel PMI once you have 20% equity in your home.
Generally speaking, it is less expensive to borrow with a conventional loan.
If you seek a conventional loan, it will be expected that you prove employment, down payment, income, and assets. Your current debt to your current income generally should not exceed 45% (depending), and your credit score should be over 600.
If you have a good credit score, solid employment, and a downpayment accessible, a conventional loan is likely the right choice for you.
This loan is backed by the Federal Housing Association and is intended to keep homeownership within reach for those who do not have high credit scores or large down payments. If your credit is 580 or higher, you can qualify for this loan so long as you can put 3.5% down. Lower credit scores are acceptable, though you will be expected to put down more than 3.5%.
The FHA loan comes with a potentially higher overall cost throughout the life of the loan as you will need to pay mortgage insurance with each monthly payment depending on the amount of your down payment.
A VA loan is intended for veterans and active-duty members of the US military. One who qualifies for this loan does not have to produce a down payment and will not be required to have mortgage insurance.
The Veterans Association guarantees these loans, which act as insurance in itself. A one-time fee is charged to this loan as a percentage of the loan amount, which can either be paid by the buyer or the seller.
USDA loans are less discussed, and many folks assume that they do not qualify. However, it is worth looking into if you meet the income requirements (under $91,900 for a family of 4 or under - as of 2021) and are looking to buy outside of a metropolitan area or a “large” population area.
Check the USDA-approved areas on their website, and you could be surprised which areas are approved for USDA loans.
These loans are intended for those purchasing a primary residence. They do not require a down payment, mortgage insurance fees are typically low, interest rates are generally below market rate, and your typical lender has access to them.
When it comes to home loans, conventional loans are the gold standard in mortgage lending for those who can afford them. They allow the purchaser to pay a lower rate over the entire life of the loan. For those who are not in a position to use a conventional loan, FHA, VA, and USDA are great ways to purchase property with a cheaper upfront cost to you.