Here Are the Most Common Home Mortgage Loans and How You Can Qualify
The process of buying a home is an incredible (and intense) experience. Proper preparation for this accomplishment is the culmination of so much sacrifice and hard work. You’ve conquered it. You have a down payment in hand, savings in your pocket, and a healthy credit report showing a consistent history of responsibility. Congratulations!
With your finances in order, the next step is to meet with the professionals. To ensure the smoothest home buying journey, you’ll first want to obtain a pre-approval through a home mortgage loan lender.
While most professionals will kindly hold your hand along the way, it is always wise to be leery of anyone who could be taking advantage of what you don’t know. The best way to guard against this is to educate yourself ahead of time.
With the help of industry expert, Corey Vandenberg, we’ve put together a guide to teach you the basics.
What are the most common types of home mortgage loans?
You may think there are too many to know. However, most lenders rely on the same four kinds. They include Conventional, FHA (Federal Housing Administration), USDA (United States Department of Agriculture), and VA (Veteran Affairs) loans. With varying requirements for borrowers to meet, there is a type of loan for almost every financial situation.
What are the requirements to qualify for each?
Meeting the qualifications for lending is a multi-step process. Lenders first look at your ability to borrow by assessing your credit score and history, savings, bank history, and even your tax returns.
Next, a lender or loan officer will match a loan product to the type of purchase you will be making – will the property be a primary residence or an investment?
Finally, the lender will discuss the terms of the loan to ensure the borrower(s) is comfortable with what is expected of them.
To be sure you are getting exactly what you want, consider the topics below as worth addressing with your lender:
Generally, a conventional loan is the hardest to qualify for, though it has the best terms. It requires a higher down payment (5%), a healthy credit history, and a minimum credit score of 620.
FHA, USDA, and VA loans were each designed with a purpose in mind whether it’s to assist lower-income households, help sustain more rural towns, or provide support to veterans.
Because of this, borrowers have a better chance at qualifying for them with lower down payments (3.5%) and credit scores, as well as a less than perfect credit history.
What are the pros and cons of each?
For those who can secure a conventional loan, they stand to reap more competitive interest rates. Borrowers also enjoy fewer attached fees, such as private mortgage insurance. However, conventional loans may not cover as much of the purchase price as borrowers are hoping for.
If your financial situation is less than perfect, an FHA loan may provide you the flexibility needed to purchase a home. These loans sometimes offer a larger loan amount to lower-income individuals. In turn, the borrowers will be obligated to pay private mortgage insurance for a significant portion if not the full life of the loan.
According to the United States Census Bureau, the majority (we’re talking 97%) of land in the U.S. is considered rural, yet less than 20% of the population lives in these areas. It’s no wonder then, that the government would encourage households to move or occupy this land through the USDA financing program.
If you’ve been dreaming of moving to the countryside or want to stay put in your rural area, the USDA loan provides 100% financing on homes that qualify. Financial requirements are less stringent than some programs, accepting borrowers with lower incomes and no down payment.
A USDA may be difficult to acquire if the household has a higher income or a poor credit score.
Vandenberg suggests, “If you are a veteran, it’s the best type of loan available.” This is because of generous financing options including funding up to 100% with no mortgage insurance and the ability to refinance the full amount later on. He does add the disclaimer that in such a hot market, the price of many homes lies outside of the loan parameters.
What are the exceptions to the qualifications of these loans, if any?
Most home-buying candidates qualify for one of the above loans. Unfortunately, because they are guaranteed by the government, their standards must be met with no exceptions.
If your credit history is blemished from medical debt or divorce, as a prospective borrower, you may find luck with a portfolio loan.
Portfolio loans differ from the previous loans because they are held and backed solely by a bank. This means so long as the bank does not sell the loan to organizations involved with government programs, they can determine their own standards. They may be willing to approve less than ideal borrowers, but not without cost to the consumer. This often comes in the form of a higher interest rate or larger down payment.
While portfolio loans extend another option to those struggling to qualify for homeownership, Vandenberg warns, “never do portfolio loans represent a better option than a standard conventional or government mortgage.” It may be a wiser choice to delay home buying until a borrower has the opportunity to raise their credit score and clean up their credit history.
Surprisingly, with positive efforts, you can start to see progress in sometimes as little as 6 months. For more information on how to improve your credit, you can consult one of our certified credit counselors at (877) 688-3328.
Obtaining a mortgage loan is the most stressful part of home buying and can come with great disappointment if you don’t qualify in your first lending appointment. Vandenberg advises to “get with someone who knows and offers more options than just a handful. Find out what you need and ask what you can do to qualify. If at first, you don’t succeed, keep on trying.”
Homeownership is a dream worth holding on to. With a well-matched home mortgage loan program, you can (and will) make it happen.
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