Which Mortgage Type is Right For You?

Oct 28, 2016

fhaBefore beginning your search for a new home, the first step is to become pre-qualified for a mortgage. There are a few different types of home loans to choose from, and the one you’ll apply for will depend on your credit score, down payment savings, income and how much you can afford.

Conventional Home Loans

A conventional home loan is the most common mortgage loan available. While some banks will approve an individual with a credit score of 680 for a conventional loan, most banks will require a score of at least 700.

In addition to an excellent credit score, banks normally require a down payment of at least 20 percent, a decent debt-to-income ratio, and documented income. A select few number of banks will allow borrowers to buy a home with less than 20 percent down on a conventional loan.

VA Home Loans

VA home loans are available to active military members, retired veterans, and qualified spouses. Most active duty military members and their families use VA home loans to buy their first homes.

Veterans and active military opt for VA home loans because they allow borrowers to purchase with zero money down. While zero down is allowed, the VA does charge an upfront fee of 1.25 to 3.3 percent of the total mortgage dollar amount. Buyers can also opt to pay the closing costs.

It’s important to remember that VA home loans are not actually loans given by the VA. The VA insures loans for veterans that are originated by private lenders.

FHA Home Loans

FHA loans are privately issued loans that are insured by the Federal Housing Administration. These are widely popular among borrowers who have very little down payment savings or lower credit scores.

Borrowers who opt for an FHA home loan can use up to 57 percent of their monthly income on a mortgage payment. Down payments can be as little as 3.5 percent of the total mortgage amount and as high as 10 percent, depending on credit score.

The downside to an FHA-backed mortgage is that the borrower has to pay an upfront insurance fee of 1.75 percent and an annual insurance premium of between .45 and .85 percent.