Understanding the Subtle Differences in Various Mortgage Loans

Getting a mortgage to purchase a home can be a little confusing.  There is so much industry  lingo that loan officers use like “terms” and “conforming” or “government loan” or “eligibility.”  Let’s look at the most common types of loans side-by-side in order to understand each one a little bit better.

 

Conventional

USDA

VA

FHA

Reverse

Credit scores

Excellent – Typically scores of 720 or
higher

Typically a score of 620 is needed

No certain credit score required;
various criteria are reviewed to determine credit worthiness

Usually, credit score of 620 is
needed.Slightly lower scores can get
approved with significant explanations and documentation

No Credit score requirements

Down Payment

Minimum 5% of the purchase price; can
be 10%

No down payment if home appraises for
more than sales price.

Not required

3.5% of purchase price; down payment
money can come in the form of gift from relative

No down payment needed

Income

Typically high income compared to other
loans

Income may not be higher than average
for the area

Debt to income ratio may not exceed 41%

House payment cannot be higher than 31%
of gross monthly income; all debt, including house payment, cannot be more
than 43% of gross monthly income

All borrowers will need to complete an assessment of finances through an approved lender. The assessment will determine that borrower is able to make insurance as well as property tax obligations of the property

Eligibility

Most people that meet the above
requirements will be eligible.

Home must be in designated rural area

Veterans as well as people currently
serving; surviving spouse of a veteran; members of Guard and Reserve

Most people that meet the above
requirements will be eligible.

Borrower must own home and be at least
62 years old. Home should be paid off or have very low mortgage balance.

Mortgage Insurance

Required if less than 20% down payment

Required
if less than 20% down payment

Not required

Required if less than 20% down payment

Not required since the loan is usually
at or below 80% of home’s value

As the chart illustrates, each kind of loan has its advantages.  Choosing a loan will depend on your current circumstances.  However, there are a few more considerations besides the type of loan.  The most important of these considerations are the terms and picking a interest rate that is either fixed or adjustable.

Term

Term simply refers to the length of a mortgage in years.  Mortgages range from 5 years to 30 years and move up in increments of 5.  Obviously, the shorter length will result in a higher payment but it also means you will pay less interest over the duration of the loan.

ARM

Adjustable Rate Mortgage or ARM refers to a loan that offers an interest rate that can change.  Most of the time the interest rate will be set for a pre-determined amount of time such as 1 to 7 years.  At the end of the “fixed rate” period the interest rate can adjust.  The rate will be based on a particular index and will adjust either once a year or once every 6 months.

All of the loans mentioned in the chart above can be offered with various terms and with either fixed rates or an ARM.  Talking to a mortgage lender will provide you with the most current interest rates, available terms and payment options to fit your circumstances.

This communication is provided to you for informational purposes only and should not be relied upon by you. Rock Realty is not a mortgage lender and so you should contact a lender directly to learn more about its mortgage products and your eligibility for such products.
 

Mortgage LoansMortgage Articles

FHA

USDA

VA

JUMBO LOANS

WHEDA

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