MOST COMMON HOME LOANS FOR BUYING A HOUSE | TIPS FOR GETTING A MORTGAGE
Buying a house has it’s perks. But do you know the most common loan types that are used? Do you know which loan would best fit your goals? In this video and article we break down everything you need to know about the different loan types and how to qualify for them.
An FHA loan is insured by the Federal Housing Administration (FHA) and is issued by a mortgage lender that is FHA-approved. The loan is designed for low to moderate income borrowers and the requirements for credit score and down payment amount are lower than for other loans.
You can borrow up to 96.5% of the homes value, meaning your down payment would be 3.5%. The minimum score to qualify for an FHA loan with that down payment is 580 or better. Although a lender may be able to get you approved if you have a lower credit score, but will require a higher down payment and assets. I wouldn’t bank on this option though, as lending restrictions are tightening.
FHA loans are popular among first time home buyers in Houston because of the ease of approval and they are less strict on the requirements to qualify.
It is worth it to note that FHA loans also come with an additional cost; a Mortgage Insurance Premium (MIP).
Remember when I mentioned that the loan is insured by the FHA? Well, if you were to default on your loan, the lender carries less risk because the Federal Housing Administration will pay a claim to the lender.
As an FHA borrower, you are required to pay MIP for 11 years or the life of the loan, depending on the length. This is included in your monthly payments.
Another note about MIP is that you are required to pay an upfront MIP when you purchase your house. It’s around 1.75% of the loan amount and can be paid up front at closing or rolled into your loan amount.
Qualifying for FHA – Quick notes:
- Your Debt-to-Income (DTI) ratio can not exceed 43%. Meaning the mortgage and all other monthly debts must be less than 43% of your gross income.
- If you are using an FHA loan to purchase a home, the home must be your principle residence, not an investment property.
- Self-employed borrowers will need to provide the lender 2 years of tax returns and profit & loss statements.
- FHA loans have limits on the loan amount they will allow. In our region, at this time, the max loan amount is $365,362 for a single family residence.
A conventional loan is not backed or insured by the government and often meets the down payment and income requirements set by Freddie Mac or Fannie Mae.
This type of loan is best for higher income borrowers with credit scores above 620.
The down payment varies from person to person, but the minimum down payment for first time home buyers is 3% and 5% for seasoned home buyers.
Unlike FHA, you won’t have MIP to pay for 11 years. However if your down payment is less than 20%, you will have to pay PMI (Private Mortgage Insurance) until you have 20% equity in the property.
With FHA loans, it doesn’t matter what your LTV (loan-to-value) is, you have to pay MIP for 11 years, and with conventional loans you won’t have to pay PMI after you’ve reached 20% LTV, even if it happened the year after acquiring your loan.
The maximum loan amount in the Houston region for conventional loans, as of this writing, is $548,250 for single family homes.
If you can qualify for a conventional loan, this may be the better option for you. But your lender will be able to let you know which one best fits your needs.
This is a fantastic option for Veterans. If you are eligible for a VA loan I would advise taking advantage of your benefits. From one veteran to another, use it if you can. It’s an amazing loan.
A couple things to note about a VA Loan:
- The minimum down payment on a VA loan is $0. Yes, you read that right, $0.
- You will need to get your Certificate of Eligibility (COE) to provide the lender. You can get your COE from the VA.
- There are no minimum credit score requirements set by the VA, however most lenders want to see at least a 580 or better.
- There is a funding fee when closing on the house. How much depends on your down payment. If you are putting down 5% or less, then your funding fee is 2.3% of the loan amount. This can be paid up front by you or rolled into the loan amount.
- You don’t have to pay any mortgage insurance like FHA and Conventional loans regardless of LTV.
If you have any questions about the different loans, we highly recommend reaching out to one of our preferred lenders. And if you are ready to apply for your home loan today, you can apply here with one of our preferred lenders. It is quick and easy.
You may also be interested in a few other articles that we have written.
What Are Your Closing Costs as a Buyer
Buying vs. Renting
10 Things to do Before You Start House Shopping
How to Find the Right Lender When Purchasing a Home
The True Costs of Owning a Home
If you are ready to start your home search, reach out to us or schedule an appointment and we would be happy to help you!
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