There are several types of loans that a potential home owner could get in today’s market. Some of these loan types include conventional, FHA, VA , USDA, and Jumbo loans.
A conventional loan is a type of mortgage in which the underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac (and can be sold on the secondary market). If you plan to stay in your home for many years and prefer a consistent mortgage payment for budget planning that never changes, a conventional loan is probably the loan for you.
Conventional Loan Features:
A conventional can have 30-, 25-, 20- and 15-year terms, which are all available with fixed interest rates. 3, 5 and 7 year adjustable-rate mortgages (ARMs) are also available. Credit scores as low as 620 may qualify (this could change and you should contact a loan officer for more information). You can refinance up to 80% of your primary home’s value. Down payments of 20% are required (primary home) without PMI (Private Mortgage Insurance). If your down payment on a home is less than 20 percent of the appraised value or sale price (whichever is less), your lender will require you to get private mortgage insurance. A mortgage insurance policy protects your lender in case you default on the payments. As a borrower, you pay the premiums, and the lender is the beneficiary.
FHA (Federal Housing Administration) Loans
Congress created the Federal Housing Administration in 1934. FHA became a part of the Department of Housing and Urban Development’s Office of Housing (HUD) in 1965. If you need less stringent qualification and credit requirements and have a down payment or home equity less than 20%, a FHA loan is probably the loan for you.
FHA Loan Features:
A FHA loan can have 30-, 25-, 20- and 15-year terms, which are all available with fixed interest rates. Credit scores as low as 620 may qualify (this could change and you should contact a loan officer for more information). You can refinance up to 96.5% of your primary home’s value. Down payments of 3.5% are required (primary home).
VA (Veteran Administration) Loans
Veterans Affairs (formerly the Veterans Administration) guarantees no down purchase mortgages for qualified veterans. Private lenders originate VA loans, which the VA guarantees. There is no mortgage insurance. The borrower pays a funding fee, which can be rolled into the loan amount. VA Loans allow a veteran, member of the military, or a surviving spouse of a veteran to buy a home with no down payment, or refinance up to 100% of your current home with fast approval and minimal red tape.
VA Loan Features:
VA Loans with terms of 30-, 20- & 15-year fixed-rate and 5-year ARMs are also available. You can refinance up to 100% of your primary home’s value with no money down options (primary home) and no monthly PMI (Private Mortgage Insurance). Credit scores as low as 620 may qualify (this could change and you should contact a loan officer for more information).
USDA (United States Department of Agriculture) Loans
The program’s full name is the USDA Rural Development Guaranteed Housing Loan program. USDA loans are insured by the U.S. Department of Agriculture. If you want to buy a home in a rural area and need to reduce or eliminate the down payment required to buy with a loan with more flexible credit requirements, an USDA loan is probably the loan for you.
USDA Loan Features:
A USDA loan allows 100% financing up to the appraised value with no private mortgage insurance and flexible credit qualifications. There is no limit on seller concessions and gifts. There are also no loan amount limitations.
A jumbo loan is a loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits. It is also called a non-conforming loan. Jumbo loans typically have higher interest rates. If you need a mortgage between $417,000 and $2,000,000 with flexible rates and terms, a jumbo loan is probably the loan for you.
Jumbo Loan Features:
Jumbo loans with terms of 30-, 25-, 20- and 15-year terms are all available with fixed or adjustable rates. Credit scores as low as 720 may qualify (this could change and you should contact a loan officer for more information). You can refinance up to 96.5% of your primary home’s value. Down payments of 3.5% are required (primary home).
Mortgage debt to income ratios
Mortgage debt to income ratios are the calculations underwriters use to determine whether a borrower can qualify for a mortgage. Debt to income ratios are used to determine if you have the capacity to repay your mortgage. There are two calculations. The first or Front Ratio is your housing expense-to-income ratio. This is to say your proposed mortgage payment (including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowner’s association fees (when applicable)) divided by your gross monthly income. The second or Back Ratio is your total monthly obligations-to-income ratio (The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses). This is your gross monthly payment including Mortgage PITI divided by your gross monthly income.
Front End Ratio:
The front end ratio (monthly payment) is a percentage of your gross monthly income (i.e. Monthly Gross Income – $3,000 X 29% = $870.00 – "ideal loan payment"). Some of the "Ideal Front end ratios" include conventional mortgages (Fannie Mae & Freddie Mac) at 28%, FHA loans at 29%, USDA loans at 29% and VA loans do not have a payment ratio. The VA looks at payment, monthly income and housing expenses; also known as the "back end ratio".
You will be qualified on principal and interest, 1/12 of the annual real estate taxes, homeowners insurance and private mortgage insurance (or monthly mortgage insurance), if applicable. Condominium or homeowners association fee is also included in the front end ratio, if applicable. All of these components should meet the payment or front end debt ratio.
Back End Ratio:
The back end ratio is the combination of the monthly mortgage payment and all of your monthly debts (i.e. credit cards, school loans, car payment, alimony, child support, etc.). Most lenders desire a 41% back end ratio for FHA & USDA loans, 36% for conventional loans, and 41% for VA mortgages (i.e. $3,000 monthly income X 29% (FHA) = $870 payment) and $3,000 monthly income X 41% (FHA) = $1,230 (includes $870 payment & $360 monthly debt)).
Please note that both the “front end ratios and back end ratios” can change and a mortgage loan officer should be consulted.