Purchase Mortgage Types

A conventional loan is a mortgage that’s not guaranteed by a government agency. They’re widely available. So you’ll have options when choosing a mortgage lender. They’re often confused with conforming loans, which are a subset of conventional mortgages. A conforming loan meets requirements to be purchased by Fannie Mae and Freddie Mac. Lenders often resell mortgages, and Fannie and Freddie buy most of the loans on the secondary market. Here are some of the key things you need to know about conventional mortgages:

  • Conventional mortgages are best for borrowers with fair or good credit. Because there’s no government guarantee, qualifying requirements are stricter. You generally need a credit score of at least 620 to qualify. Higher is preferred.
  • Conventional loans require a down payment. The minimum is 3% with some lenders. It’s more common to require at least 10% down. All or part can come from a down payment gift (depending on your circumstances).
  • Private mortgage insurance is typically required with a down payment below 20%. This protects the lender in case of foreclosure.
  • Conventional mortgages come in different forms. You could choose a fixed-rate conventional mortgage or one with an adjustable rate, and you’ll have a wide selection of repayment timelines including 15 years, 20 years, or 30 years.

FHA loans are mortgages backed by the Federal Housing Administration. Because of the government guarantee, lenders take less risk and qualifying requirements are more lax. However, there are some additional costs you won’t usually incur with conventional loans. Here are some of the key things you need to know about an FHA loan:

  • FHA loans are best for borrowers with poor or fair credit or with minimal down payments. Borrowers can qualify with a credit score as low as 500 with 10% down or 580 with 3.5% down. All of your down payment can come from a down payment gift.
  • Mortgage insurance is required. There’s an upfront fee of 1.75% and an annual fee based on loan term and the ratio of your loan amount relative to home value. In some cases, mortgage insurance premiums must be paid for the life of your loan.

A VA loan is guaranteed by the Veterans Administration. The VA offers direct loans and also guarantees loans from private VA lenders. Although there are some upfront fees, VA loans are easy to qualify for and designed to be affordable. Here are some of the things you should know about VA mortgages:

  • VA loans are available only to active-duty military members and eligible veterans.
  • There’s no down payment required.
  • No mortgage insurance is required. This is true regardless of your down payment.
  • There’s an upfront funding fee. The fee varies depending on your down payment and whether you’ve already obtained a VA loan in the past. Some borrowers don’t have to pay this, including those eligible for VA compensation for service-connected disabilities.

A USDA loan is guaranteed by the U.S. Department of Agriculture. The USDA makes direct loans, or guarantees loans made by USDA mortgage lenders. USDA loans are targeted for lower income borrowers purchasing homes typically in rural areas. Here’s what you need to know about USDA loans:

  • USDA loans are best for borrowers with limited incomes and low down payments. No down payment is required for USDA loans.
  • Borrowers and properties must meet eligibility criteria for a USDA loan. There are income limits, as well as loan limits and restrictions on the type and location of property purchased.
  • USDA loans come up with upfront and ongoing fees. The upfront funding fee is 1% of the loan amount and the annual fee is 0.35% of the average scheduled unpaid principal balance.

A jumbo loan is a loan for a larger amount of money. The specific threshold at which a loan becomes “jumbo” varies by location and changes periodically. A loan is “jumbo” if it’s too large to be purchased by Fannie Mae or Freddie Mac. Here’s what you need to know about jumbo loans:

  • Jumbo loans are best for borrowers with excellent financial credentials who are purchasing expensive homes. Many lenders require a credit score above 700.
  • Down payment requirements are often higher. Some lenders allow you to take jumbo loans with just a 10% down payment. Many require you to put down 20% or more.
  • Mortgage insurance is usually required with less than 20% down. Jumbo loan rates can be fixed or adjustable. You’ll have a choice of loan terms including 15-year or 30-year loans.

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