The most common home mortgage options include:
Conventional financing refers to loans that are purchased by Fannie Mae and Freddie Mac, which means that borrowers must meet guidelines established by those agencies. Generally, conventional loans offer the best rates for buyers with the highest credit scores and are limited to borrowers with a credit score of at least 620 or higher. Borrowers are limited to a maximum debt-to-income ratio of 45% to 50%, but some lenders will require a lower ratio. (A debt-to-income ratio compares the minimum payment on all recurring debt including your housing payment with your gross monthly income.) Conventional loans are available with a down payment of as low as 3% or 5% for some buyers. However, borrowers who make a down payment of less than 20% must pay private mortgage insurance until they have at least 20% in home equity. Loan limits are set annually for conventional loans and vary according to prices in each housing market.
FHA loans, which are guaranteed and insured by the Federal Housing Administration, generally offer more lenient qualification guidelines than conventional loans. Interest rates for FHA loans are comparable to conventional loan rates, but they aren’t adjusted according to your credit score. This makes these loans popular with borrowers with a lower credit score or a higher debt-to-income ratio. In addition, FHA loans require a down payment of just 3.5%. However, mortgage insurance is typically higher on FHA loans than on conventional loans and is required for the entire loan term. FHA loans also have limits set annually according to local home prices.
VA loans are guaranteed and insured by the Veterans Affairs department and are a benefit to members of the military, veterans and employees of the Defense Dept. For those who qualify, VA loans offer the benefit of zero down payment requirement without paying mortgage insurance. VA loans don’t have a limit as long as borrowers can qualify for the payments.
Rural development home loans, which are guaranteed and insured by the U.S. Department of Agriculture, require borrowers to meet income limits and buy a property in an area that is designated as rural. No down payment is required for these loans. An annual guarantee fee is required, but mortgage insurance is not required.
Jumbo loans are loans for an amount above the established loan limit in your area. Generally, lenders require a higher credit score for these loans since they are for larger amounts. Typically, borrowers need to make a down payment of 20% or more for jumbo loans, but some lenders allow for a down payment of 10% or 15%.
Purchase Offers and Financing
In a competitive housing market, some sellers prefer to accept offers only from borrowers with a conventional loan or with cash because they worry that government-insured loans may cause settlement delays. While this is not true, it can be an obstacle for some buyers.
Even with the array of financing options available, you may also want to consider partnering with Revive to make an all-cash offer for a home. Essentially, you can compete with investors and buyers who don’t need financing. Revive will make an all-cash offer on your behalf, you move into the new home and then after you sell your current home you purchase the new one from Revive.
Learn more about Revive’s ‘Prepare to buy’ program here.