Which Home Loan Fits Your Needs?

When you apply for a mortgage, you may find you have a lot of choices. Most people think of conventional loans first, but there are other options too.

Here’s what you must know about each loan type, how to qualify, and what you should consider.

Conventional Loans

Typically to get a conventional loan, you need great credit, a 20% down payment, and a manageable debt-to-income ratio. These loans are for borrowers who are low risk and can prove it.

To qualify you must:

• Have a credit score of at least 620 for most lenders
• Have a debt-to-income ratio of 45% or less
• Prove you have stable income and employment
• Have at least 3% down for a first-time buyer and 5% for anyone else
• Be able to afford Private Mortgage Insurance if you make a down payment lower than 20%

Pros:

• You can request the lender cancels your PMI when you pay the balance below 80% of the home’s value
• Conventional loans have the most competitive interest rates and fees
• You can use conventional loans on any type of home including vacation homes, second homes, and investment homes

Cons:

• You need great credit to qualify
• There’s a long waiting period if you’ve had a foreclosure or bankruptcy

FHA Loans

Many borrowers use FHA loans when they don’t qualify for conventional loans. If you don’t have the credit score or debt ratio to qualify, an FHA loan can be a good option. FHA loans have much more flexible underwriting requirements to make it easy for anyone to buy a primary residence.

To qualify you must:

• Have a credit score of 580 or higher
• Put down at least 3.5%
• Put down at least 10% if you have a credit score between 500 – 579
• Live in the home as your primary residence
• Have a debt-to-income ratio of 43% or less
• Prove you have stable income and employment

Pros:

• You can qualify without perfect credit
• Lenders only require 3.5% down on the home
• You can qualify with much more debt than with a conventional loan

Cons:

• You pay mortgage insurance for the loan’s entire term (you can’t cancel it)
• You must live in the home as your primary residence; you can’t use it for vacation homes, second homes, or investment homes

USDA Loans

If your total household income is less than 115% of the area’s median income and you’ll buy a home in a rural area as determined by the USDA, you may qualify for loan with no down payment requirements. USDA loans have even more flexible guidelines to help families own a home that otherwise can’t qualify for financing.

To qualify you must:

• Have at least a 640-credit score
• Have a debt-to-income ratio no higher than 41%
• Live in the home as your primary residence
• Prove you do not qualify for any other financing
• Prove you have stable income and employment

Pros:

You don’t need a down payment

• Mortgage insurance premiums are lower
• USDA financing is available on almost all property types

Cons:

• Eligibility is based on total household income, not just the borrowers’ income
• You pay mortgage insurance for the life of the loan

Jumbo Loans

If you need to borrow over $647,200 – $970,800 (depending on your county’s jumbo loan limit), you won’t qualify for traditional financing (conventional or FHA). The conventional loan limits stop at $647,200, which means you’ll need jumbo financing. These loans are privately funded, and the requirements may vary by lender.

To qualify you must:

• Have a credit score of 700+
• Have a debt-to-income ratio of 43% or less
• Put at least 10% – 30% down on the home
• Prove you have stable income and employment
• Prove you have reserves (liquid assets on hand)

Pros:

• You can borrow much higher loan amounts
• You can buy a primary residence or investment home
• The qualification requirements vary by lender giving you more options

Cons:

• You may need great credit and/or a large down payment
• Not all lenders offer them

Final Thoughts

Ready to apply for a mortgage? You have a few options. Look at your credit score, debt-to-income ratio, and the reason you need financing. If you’re buying a home for any purpose except to live there, your options are conventional or jumbo loans.

If you are buying a primary residence, though, you have many options. Comparing the interest rate, terms and total loan costs will help you decide which loan is right for you. The key is to take the loan that costs the least and is the most affordable monthly so you can enjoy homeownership with ease!

Lastly, if you’re not happy with the rates and terms your lender provides, ask about using CreditXpert to increase your mortgage credit score. Improving your credit score could make a big difference in your purchase power.  From our research, 71% of consumers could increase their credit score by 20 points in 30 days or less. Need help finding a lender that uses CreditXpert, ask your realtor to help!