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	No income requirement
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.

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