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When it comes to purchasing or refinancing a home, there are a multitude of mortgage products to choose from. Each product has its own strengths and weaknesses, as well as its own unique eligibility requirements. It is important to evaluate one’s own financial situation to find a mortgage product that is tailored best to their needs.
These loans are widely available through most lenders. Borrowers must put down at least 5% of their own funds. If the borrower puts less than 20% down, Private Mortgage Insurance (PMI) is required. For those putting more than 10% down, and with credit scores above 700, conventional loans are an attractive option.
These loans are available through most lender to anyone who meets the underwriting guidelines of the Federal Housing Administration. FHA loans are offered at current market rates and only require a 3.5% down payment which can be gifted entirely or partly. The FHA accepts credit scores as low as 600 and boasts lenient debt-to-income ratio requirements compared to conventional financing. These loans can even be co-signed by a non-occupant third party. Note: Loans must not exceed the FHA Mortgage Limit for the county in which the property is located (e.g. Clackamas County FHA Mortgage limit is 408,250).
Jumbo loans are any loans that exceed the conventional conforming loan limits. Typically, loans amounts are below $417,000.00. Since these loans can not be purchased on the secondary mortgage market by Freddie Mac and Fanny Mae, they often have higher rates and are harder to qualify for than most other mortgage products. Most jumbo loans require down payments of 20% or more along with high credit scores and low debt-to-income ratios.
VA loans are reserved for past and present military service members and their families. Although these loans can be secured through most lenders, they are managed by the Department of Veteran Affairs. The loans can finance up to 100% of a home’s purchase price at current market rates. These loans have no mortgage insurance requirement so there is no need for any down payment and applicants can have credit scores as low as 600. There is an upfront VA funding fee that varies and can be financed into the loan. The funding fee is generally required although there are a few exceptions.
The United States Department of Agriculture oversees this loan program although it is available through most lenders. Similar to VA loans, the USDA loan allows for 100% financing at current market rates with no mortgage insurance and accepts credit scores as low as 600. To qualify, the home must be located in an eligible rural or suburban area and the borrower must not make more than the allowed income. These loans require a 3.5% upfront funding fee but this fee can be financed into the loan.
Stated Income Loans are no longer available for owner-occupied homes, but they are available for investment properties as they are considered �business loans�. They are excluded out of the Frank Dodd’s regulation, thus under less scrutiny. If a borrower plans on purchasing a property that they do not wish to live in, this loan may be appropriate. For borrowers with very good credit ratings and the ability to put 30% or more down for an investment property, this financing option allows for property flippers to take on a project without having to finance it completely out of their own pocket. These loans generally come with higher interest rates, so it’s only advisable for veteran short-term investors.
As with any financial decision, a cost-benefit analysis is necessary to determine which home mortgage product is best-suited to one’s own needs. Taking these options into account before settling on a home can be helpful in ensuring that you are able to utilize one of your biggest financial decisions of your lifetime.