4 Most Common Mortgage Loans
1. Federal Housing Administration (FHA) Loan
As the name suggests, an FHA loan is one that is backed by the FHA. With their low down payment requirement and more flexible credit criteria, these types of loans are hugely popular among first-time home buyers. While the down payment is lower than conventional loans, interest rates may be higher, so doing your research before committing to the loan will come in handy.
Qualifications: you must be of legal age, have a steady employment (same employer) for the past 2 years, have a property appraisal from a FHA-approved appraiser and the home to be purchased should be your primary home.
Down Payment: Unlike conventional loans that require a 20% down payment, you can qualify for the loan with a 3.5% down and a 580 or higher credit rating. If you fall short of the ideal credit score (500-579), you can still qualify provided you place a 10% down payment.
Interest: As a consequence of lower down payments and less strict credit criteria, the FHA loan requires borrowers to pay both the upfront and monthly MIPs for the property.
2. Veterans’ Affairs (VA) Loan
Similar to the FHA loan, the VA loan is backed by its namesake, the Department of Veterans’ Affairs. From the name itself, this type of loan is geared towards providing assistance to veterans or currently active servicemen and reserve members.
Qualifications: 90 continuous days of active service during wartime or 181 days of active service during peacetime. You’ve served 6+ years in the National Guard; or your spouse was a service member who died in the line of duty.
Down Payment: Eligible borrowers don’t need to place a down payment to get the home.
Interest: with a VA loan, you’re not required to pay a PMI. Instead, there is a VA funding fee which you pay one time. This is about 2.3% of the amount borrowed.
3. United States Department of Agriculture (USDA) Loan
Another government-backed loan is the USDA loan. The whole premise of this loan type is to help families in rural areas become homeowners. They believe that doing this “creates strong communities and a better quality of life“.
This loan is targeted for low-income individuals with less than ideal credit scores. One limitation is that you have to buy a home in a designated rural area in order to qualify. Now, to be clear, the term ‘rural’ doesn’t just refer to places in the middle of nowhere, but also includes some suburban areas close to big cities.
Qualifications: Among other things, you’re a US citizen of legal age, you fall under the “low income” bracket in your potential area and must live in the property as your primary residence.
Down Payment: Same as the VA loan, no down payment is required by the USDA. However, you’ll still need to cover for the closing costs.
Interest: Since USDA loans don’t require a down payment, you will have to pay insurance premiums (1-2% of the loan amount) which keeps the USDA loans program running.
4. Conventional Loan
The odd one out, a conventional loan is the only loan type here that isn’t backed by the government. This is generally the best route to take if you have the proper qualifications and credit rating to back you up.
Generally offering the most competitive interest rates and terms, conventional loans have the potential to afford borrowers with lower monthly payments compared to the other loan types mentioned above.
Qualifications: In order to qualify for a conventional loan, you must be of legal age, have a stable income, a good credit score, and have an acceptable debt-to-income ratio of less than 43%.
Down Payment: A sizable down payment (20% of the loan amount) is ideal although a range of 3-25% of the loan amount is accepted.
Interest: If your down payment is less than 20% of the loan amount, you will have to pay the PMI. However, this will be lower compared to that of the MIP associated with an FHA loan.