Getting a better understanding of all your home loan options can help you make the best financial decision.Let’s take a closer look at the four major types of home loans.
Who can use it: Eligible veterans, active-duty military members, and qualified surviving spouses. The VA doesnt set a credit score benchmark, but most lenders will have one. A 620 FICO score is a common minimum.
What its all about: VA home loans are backed by the government but issued by private lenders. VA loans offer no down payment requirement, no mortgage insurance, and looser credit requirements. VA loan guidelines account for borrowers whose finances may have been affected by their service. Credit score requirements are typically lower than those for conventional loans, and the program allows for more wiggle room when it comes to debt-to-income ratios, credit scores, and assets. They also tend to have lower average interest rates than other loan types.
What to watch out for: The VA loan program is designed to help veterans and military members purchase safe, structurally sound homes theyll occupy as their primary residence. VA loans are not available for investment properties or vacation homes. A funding fee of no more than 3.3% of the loan amount helps keep the program going and can be paid upfront or rolled into your loan amount. Buyers who receive compensation for a service-connected disability dont have to pay this fee.
Who can use it: Anyone with at least a 580 FICO score (or lower in special cases), adequate income, and at least 3.5% down may be eligible to use an FHA loan.
What its all about: Much like the VA program, the FHA program helps increase access to homeownership through lower down payment options, competitive interest rates, and less rigorous underwriting guidelines. FHA loans also tend to have the lowest minimum credit score requirements of all the loan types. Depending on their individual approval guidelines, some lenders will even allow for exceptions to the minimum credit requirement. The FHAs 203(k) program allows borrowers to purchase and repair fixer-uppers, lending based on a homes projected value after rehab work is completed.
What to watch out for: FHA buyers pay both an upfront funding fee (called a mortgage insurance premium) as well as an annual mortgage insurance charge. The latter can easily add $150 or more to your monthly mortgage payment, and its a cost FHA buyers now pay for the life of their loan, regardless of their equity status.
Who can use it: Buyers looking to settle in an approved rural area who have adequate (but not excessive) income and an acceptable credit score can use the USDA loan program. USDA lenders often look for at least a 640 FICO score.
What its all about: Much like the VA loan, the USDA program allows qualified buyers to purchase a primary residence with no money down. USDA-eligible homes are located in what the agency deems qualified rural areas. Buyers need to verify that a property is located in one of these eligible areas. Along with no down payment, another big benefit of USDA loans is that buyers can finance their closing costs.
What to watch out for: USDA puts a cap on income for eligible borrowers. These limits vary by region and family size and can change annually. Like FHA loans, USDA loans come with both an upfront mortgage insurance premium and an annual mortgage insurance fee.
Who can use it: Anyone with qualifying credit (in the ballpark of a 660 FICO or higher), adequate income, and a 5% down payment in most cases. Some lenders may offer conventional financing with just 3% down.
What its all about: In terms of credit scores and debt-to-income ratios, these loans have higher barriers to entry than the government-backed options. Conventional lenders are looking for borrowers who have well-established credit, solid assets, and steady income. The upside is that when it comes to the kind of property you can purchase, youll have more freedom with conventional financing. That means you can use this type of loan to buy a second home or an investment property.
What to watch out for: Buyers putting less than 20% down will pay PMI, or private mortgage insurance, until they build sufficient equity in the property. These fees can easily add $100 or more to your payment every month. Unless you have excellent creditthink 740 or abovea conventional loan may come with higher rates and fees.
This article was written by Chris Birk, director of education at Veterans United Home Loans and author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.”