One of the most nerve-wrecking parts about buying a home is determining how you’re going to pay for it. Most people don’t have enough cash in reserve to pay for a home outright, but the majority of people also don’t know about the various types of available loans that can help you pay for a home. The four most commonly used loan types are conventional, FHA loans, VA loans, and USDA loans. Here is a short breakdown of what loans you should look into before deciding how you’re going to pay for your next home.
There are two main types of mortgages based on who provides the funds. Mortgages can be defined as either government-backed or conventional. Government agencies like the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) insure home loans, though the loans are still made through private lenders. Conventional loans are backed by financial institutions and are the most commonly known.
Conventional Loans
A conforming loan is one that meets the standards of loan guidelines established by government-sponsored enterprises Freddie Mac and Fannie Mae. The most well-known conforming loan guideline is the size of the loan. This type of loan typically requires a minimum of 5 percent down, which can be a gift from a relative. Often borrowers will put 10 to 20 percent down to reduce or eliminate the cost of private mortgage insurance. Borrowers typically need a 620 credit score and a debt-to-income ratio of under 45 percent. These types of loans are available up to $417,000. Jumbo loans are available for loan amounts that exceed this amount and have their own guidelines.
FHA Loans
An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. An FHA down payment of 3.5 percent is required. Borrowers who cannot afford a traditional down payment of 20 percent or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario.
Another advantage of an FHA loan is that it can be assumable, which means if you want to sell your home, the buyer can “assume” the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.
For the greater Austin and surrounding areas, the loan limit for FHA loans is $331,200. FHA loans are not restricted to first time home buyers, but generally borrowers are only eligible for one FHA loan at a time.
VA Loans
A VA loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA). The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses. One of the major benefits of a VA loan is that it offers 100% financing. The payments are often lower as mortgage insurance is not required. The VA finances an up-front funding fee in lieu of mortgage insurance. Disabled veterans are exempt from this funding fee.
USDA Loans
The US Department of Agriculture (USDA) guarantees loans made by private lenders through its Guaranteed Housing Loans program, which is designed for low to moderate income borrowers purchasing homes in rural areas. To qualify your income can not exceed 115% percent of the median income for the area and the property must lie in a rural area. One of the major benefits of this loan is that it offers 100% financing with no down payment requirement. For more information visit https://eligibility.sc.egov.usda.gov.
Depending on your circumstances, you may qualify for one or more different types of loans. Make sure to check with a licensed lending professional to determine which loan type you can qualify for and would work best for your situation. The RJF Team highly recommends Carson Vaughn at AmeriPro Funding. If you have any questions about loan types or how to start finding out what you may qualify for, contact Carson at 512.439.7555 or email him at Carson@AmeriproHomeLoans.com.
