Which mortgage is right for you?
For most mortgage borrowers, there are three major loan types: conventional, FHA and VA. Here is how they compare.
1. Conventional loans
Who they’re for: Conventional mortgages are ideal for borrowers with good or excellent credit.
How they work: Conventional mortgages are “plain vanilla” home loans. They follow fairly conservative guidelines for:
■ Borrower credit scores.
■ Minimum down payments.
■ Debt-to-income ratios.
This last one is the percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
Cost: Lender fees, third-party fees, down payments, mortgage insurance and points can mean the borrower has to show up at closing with a sizable sum of money out of pocket.
What’s good: Conventional mortgages generally pose fewer hurdles than Federal Housing Administration or Veterans Affairs mortgages, which may take longer to process.
What’s not as good: You’ll need excellent credit to qualify for the best interest rates.
2. FHA loans
Who they’re for: Federal Housing Administration mortgages have flexible lending standards to benefit:
■ People whose house payments will be a big chunk of take-home pay.
■ Borrowers with low credit scores.
■ Homebuyers with small down payments and refinancers with little equity.
How they work: The Federal Housing Administration does not lend money. It insures mortgages.
The FHA allows borrowers to spend up to 56 percent or 57 percent of their income on monthly debt obligations, such as mortgage, credit cards, student loans and car loans. In contrast, conventional mortgage guidelines tend to cap debt-to-income ratios at around 43 percent.
For many FHA borrowers, the minimum down payment is 3.5 percent. Borrowers can qualify for FHA loans with credit scores of 580 and even lower.
Cost: Each FHA loan has two mortgage insurance premiums:
■ An upfront premium of 1.75 percent of the loan amount, paid at closing.
■ An annual premium that varies. Most FHA homebuyers get 30-year mortgages with down payments of less than 5 percent. Their premium is 0.8 percent of the loan amount per year, or $66.67 a month for a $100,000 loan.
What’s good: FHA loans are often the only option for borrowers with high debt-to-income ratios and low credit scores.
What’s not as good: To get rid of FHA premiums, you must refinance the loan.
3. VA loans
Who they’re for: Most active-duty military and veterans qualify for Veterans Affairs mortgages. Many reservists and National Guard members are eligible. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.
How they work: No down payment is required from qualified borrowers buying primary residences. The VA does not lend money, but guarantees loans made by private lenders.
Cost: The VA charges an upfront VA funding fee, which can be rolled into the loan or paid by the seller. The funding fee varies from 1.25 percent to 3.3 percent of the loan amount.
The VA allows sellers to pay closing costs but doesn’t require them to. So, the buyer might need money for closing costs. Borrowers may need money for the earnest-money deposit.
What’s good: VA borrowers can qualify for 100 percent financing. Veterans do not have to be first-time buyers and may reuse their benefit.
What’s not as good: According to the VA, there isn’t a cap on the amount you can borrow. “However, there are limits on the amount of liability VA can assume, which usually affects the amount of money an institution will lend you. The loan limits are the amount a qualified veteran with full entitlement may be able to borrow without making a down payment. These loan limits vary by county, since the value of a house depends in part on its location.”