Well, I can’t tell you the exact mortgage loan a buyer would qualify for because first, I don’t know you and two, everybody’s situation is different. Income, credit score, and debt all play a big part in which one is a fit.
There’s all kinds of programs out there and millions of loans are processed yearly. According to National Credit Union Administration, in 2017 there were 12.1 million home loan applications, of which 7.3 million resulted in loan originations, and 2.1 million in purchased loans.
The ones I’m going to talk about are the 3 mortgage loans I see the most. The loan you use depends on what you can qualify for. Now, you might be a strong borrower and can qualify for all three. But, it you don’t worry, there’s still a good chance you’ll get 1 out of 3.
Let’s start with my all time favorite.
Veteran’s Affair (VA) Loan
Shout out to all of the vets out there! The VA loan is my absolute favorite. Not only because I used it to buy my first house (you didn’t know I was prior service did you), but because you can buy a house with zero money out of pocket.
You do have to pay a 2.15% funding fee unless you or a spouse has a service connected disability. The fee goes to the Department of Veteran’s Affairs to cover losses and keep the program running.
The good news is the funding fee can be financed right back into your loan. Veterans and surviving spouses who didn’t remarry can qualify.
Another bonus about the VA loan is you don’t have to pay primary mortgage insurance. PMI is used to protect the lender in case you stop making mortgage payments and is required anytime you put less than 20% down.
The VA doesn’t set the credit scores. Mortgage companies do. Make sure you know the lender’s minimum credit score requirements before you start the loan process.
Conventional Loan
This is the only loan on this blog post that is not insured or guaranteed by the government. It’s backed by private lenders. The minimum down payment is 3% if you qualify.
Most mortgage companies prefer this loan. Why? I’m glad you asked. Banks like the conventional loan because it’s generally for more secure buyers. Conventional buyers are more likely to put down more than the minimum down payment.
You have what they call “skin in the game.” Out of the three loans, the risk of the bank foreclosing is the lowest because you had to pay a big chunk of the loan upfront. The default rate for conventional loans in 2018 was 1.1%.
Unlike the VA loan, there’s the dreaded PMI if your down payment is less than 20%. Getting the banks to take eliminate your PMI at 80% requires you to jump through a whole bunch of unnecessary hoops. It will automatically falls off when the mortagage balance drops to 78%.
Despite the higher down payment, almost 75% of borrowers had conventional loans. You need a good credit score that’s 640 or higher.
Federal Housing Administration (FHA) Loan
The FHA loan is the Jan Brady of the 3 loans. Some of y’all will have to look up who she is to get what I mean. Man, I’m getting old.
Anyway, this loan suffers from the middle child syndrome. It’s smack dab in the middle. It doesn’t have the cheapest nor the most expensive down payment. It’s not exclusive like the VA loan nor is it high class like the conventional loan. It’s just…blah.
To get a FHA loan, you need at least a 3.5% down payment. Since you’re putting down less than 20%, what will you have to pay? “What is PMI, Alex”. Correct answer.
Your credit score can be as low as 580. Keep in mind with low credit scores, your interest rate will be through the roof. Over the course of the loan, you’re going to be paying thousands more than borrowers who have 620 or higher scores.
Unfortunately, not a lot of sellers like FHA borrowers. They worry the banks will find financial issues and the buyer’s loan will be denied. Most of those fears are not true.
Conclusion
Which mortgage loan works best for you and your situation? Or did you get a hat trick? Translation for non-hockey fans: Did you qualify for all three loans?
Even if you think you can’t buy a house, talk to a mortgage loan officer. After they get your information, they will be able to tell you if you can qualify. The list I wrote about are the top loans. There’s a lot more loans out there waiting for you.