Conventional Loan
A conventional loan underwritten and originated by a private lending agency, but is insured by Fannie Mae or Freddie Mac, the government sponsored enterprises that regulate the mortgage lending industry. This federal backing lessens the lender’s risk in extending credit; however, in exchange for this certainty the lending institution must conform to agency lending guidelines – hence why these are often described as “conforming” loans. Interest rates on these loans are traditionally much lower than uninsured alternatives (sometimes referred to as “Hard Money”).
620 is the minimum FICO score required for a conventional loan, and 5% is the standard down payment; however, a conventional loan product does exist – offered by Fannie Mae and Freddie Mac – which, on a case-by-case basis, allows for as little as 3% down. In all cases, putting down less than 20% on your home purchase will require that you pay monthly private mortgage insurance premiums (PMI) until you reach 20% equity in your home. This loan type is ideal for borrowers with 5% down or more, and who have ‘fair’ to ‘excellent’ credit.
FHA Loan
Backed by the Federal Housing Administration (FHA), the FHA loan has been helping people become homeowners since 1934. The FHA loan was created to assist borrowers achieve homeownership who may be underqualified for conventional financing due to credit-challenges and/or down payment limitations. FHA loans allow for a minimum FICO score of 580, as long as you put 3.5% down. If you have at least 10%, however, a score of 500 is acceptable.
It’s important to note that FHA loans come with two mortgage insurance premiums: one which you’ll pay upfront and another that will be due monthly for the entire life of the loan (irrespective of equity position).
VA Loan
If you’re an active-duty or veteran military member or an eligible spouse, a VA loan might be a good fit. The most noteworthy benefit of a VA loan is that you don’t need a down payment and won’t be required to pay mortgage insurance. You will, however, pay an upfront funding fee, which will be a percentage of the total loan amount. The percentage charged will depend on (a) your down payment amount (0%, 5%+, 10%+), and (b) whether or not you’ve used your VA entitlement for a home loan before. ***the funding fee can be waived for veterans with VA-approved disabilities related to their military service***
USDA Loan
A Department of Agriculture or USDA loan should be on your radar if you wish to buy a home in a rural area. You may qualify for a USDA loan if your home is located in a USDA-eligible area and you meet certain income limits. Even though some USDA loans don’t require a down payment, there are upfront fees and annual fees.
Jumbo Loan
The government agencies that guarantee the previously mentioned loan types (HUD, VA, The Department of Agriculture, and Fannie Mae/Freddie Mac) have limits on how much they’re willing to lend, based on which county a property is located in. A “jumbo loan” is an identifier for any loan amount that exceeds said county loan limits. Because jumbo loans are not guaranteed by federal agencies, underwriting standards are not required to ‘conform’ to agency guidelines either. As such, the lender is able to dictate who they’ll lend to and how on a case-by-case basis. These loans are considered riskier for lenders being that they do not have federal backing – so the rates are often higher and the underwriting requirements more stringent. If you have plans to buy an expensive home, a jumbo loan is likely your best bet. You’ll also need a high credit score in the 700s to get approved for one.
Bank Statement Loan
If you’re a business owner, entrepreneur, gig worker, or consultant, you know that proving your income for a home loan through previous tax returns, W2s, and pay stubs can be a real challenge. That’s where a bank statement loan comes in. It can allow you to use your bank statements to obtain a home loan and show you can repay the amount you borrow. Depending on the lender, you may be able to use your personal or business bank statements.
DSCR Loan
Also known as an investor cash flow loan, a DSCR (Debt-Service-Coverage-Ratio) loan can give you the chance to qualify for a new mortgage based off of a property’s rental income instead of your personal income to finance an investment property. You won’t need personal income to qualify so you won’t be asked you to share your tax returns, W2s, or pay stubs. They do, however, require that the rental income generated by the property meets or exceeds a certain coverage ratio.
