Comparing The Top 4 Mortgage Options

Choosing your mortgage is just as important (and hard) as choosing a home. Before you head out to look at homes, it’s a good idea to get pre-approved for a mortgage. Before you get pre-approved, though, it helps to understand your options. Check out the various mortgage options available to you.

Conventional Loans

Conventional loans are non-government loans but follow the Fannie Mae and Freddie Mac guidelines. Borrowers with some money saved, good credit, and debts under control are a good candidate for a conventional loan.

How to Qualify

  • Minimum 660 credit score (this may vary by lender)
  • Your housing payment can’t take up more than 28 percent of your gross monthly income
  • Your total debts (car, student loans, credit cards, new mortgage, etc.) can’t take up more than 36 percent of your gross monthly income
  • Steady income and employment for the last 2 years
  • Minimum 5 percent down payment

Pros/Cons

Pros

  • Competitive interest rates and terms
  • Low down payment requirements (with PMI)
  • Attractive terms including 15, 20, 25, and 30 year fixed or adjustable-rate terms
  • You can cancel PMI once you owe less than 80 percent of the home’s value

Cons

  • Only good credit borrowers qualify
  • Private Mortgage Insurance can get expensive

Understanding Financial Literacy; Mortgage Options

FHA Loans

FHA loans are a government-backed loan with more flexible guidelines and are good for borrowers with less-than-perfect credit.

How to Qualify

  • Minimum 580 credit score
  • Minimum 3.5 percent down payment
  • Your housing payment can’t take up more than 31 of your gross monthly income
  • Your total debts (car, student loans, credit cards, new mortgage, etc.) can’t take up more than 43 percent of your gross monthly income
  • Steady income for the last 2 years

Pros/Cons

Pros

  • FHA loans have the lowest credit score requirements
  • 100 percent of your down payment can be gift funds
  • Higher debt-to-income ratios allowed
  • Mortgage insurance is cheaper

Cons

  • Mortgage insurance lasts for the life of the loan
  • Borrowers pay an upfront mortgage funding fee too
  • Lower borrowing limits based on the limits in your county

USDA Loans

USDA loans are government-backed loans for low to moderate-income families in rural areas with no down payment requirements.

How to Qualify

  • Minimum 640 credit score
  • Meet the income limits of the USDA program
  • Buy a rural property according to the USDA guidelines
  • Your housing payment can’t take up more than 29 percent of your gross monthly income
  • Your total debts (car, student loans, credit cards, new mortgage, etc.) can’t take up more than 41 percent of your gross monthly income
  • You must live in the property as your primary residence

Pros/Cons

Pros

  • You don’t need a down payment
  • Mortgage insurance rates are lower than FHA loans
  • Competitive interest rates
  • Flexible underwriting guidelines

Cons

  • You may only buy a rural property according to the USDA map
  • You pay mortgage insurance for the life of the loan
  • There are income limits

VA Loans

Veterans or current military members may qualify for 100 percent VA financing, which is a government-backed program.

How to Qualify

  • Have at least a 620 credit score (this varies by lender)
  • You must be a veteran of the military or a current member, each of which requires at least 181 days of service during non-war time or 90 days during wartime
  • Your total debts (car, student loans, credit cards, new mortgage, etc.) can’t take up more than 43 percent of your gross monthly income
  • You must live in the property as your primary residence
  • Have stable income and employment for the last 2 years

Pros/Cons

Pros

  • You don’t need a down payment
  • The underwriting guidelines are very flexible
  • There’s no monthly mortgage insurance
  • There aren’t any geographical limitations

Cons

  • There’s an upfront funding fee every time you take out a VA loan
  • They are only for primary residences
  • Only veterans qualify and sometimes a surviving spouse

Bottom Line

Understanding your loan options helps you choose the right program. A mortgage is one of the largest investments you’ll make in your lifetime, so know your options, make sure you can afford it, and that you understand the full implication of the loan over its lifetime.

Need help sorting through your mortgage options? Filance is here to help. Download the Filance app today to speak with a certified financial expert.

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