Types of Mortgages

There are four main types of mortgage loans. They are the Conventional Loan, FHA Loan, VA Loan, and the USDA Loan. The one that works best for you will depend on your situation:

  • Conventional Loan -  When most people think of a mortgage, they’re thinking of a conventional loan.  Conventional loans are the closest you can get to a ‘standard’ mortgage. There are no special eligibility requirements, pretty much all lenders offer them, and you can qualify with just 3% down and a 620 credit score.

    • Conventional loan requirements vary by lender. However, all conventional loans have to meet certain guidelines set by Fannie Mae and Freddie Mac. These include a 620 credit score, a debt-to-income ratio lower than 43%, and at least a 3% down payment. The mortgage also has to be within conventional loan limits: up to $510,400 in most areas.

    • If you apply for a conventional loan with better credentials — like a credit score of 740+ and 20% down payment — you’ll get access to lower rates and a lower monthly payment. 

    • On the flip side, maybe you’re just on the edge of qualifying for a conventional loan. If you have a credit score right around 620, and higher levels of debt, you’ll want to be extra sure to shop around.

    • Thanks to their wide availability and low rates, conventional loans are the most popular mortgage in the U.S. In fact, almost 3 in 5 buyers use a conventional loan when they buy a house or refinance.  

    • Minimum down payment for a conventional loan

      • It’s a common myth that you need a 20 percent down payment for a conventional loan; you can actually get one with as little as 3 percent down. All told, there are six major options for conventional loan down payments, ranging from 3-20 percent.

        • Conventional 97 loan — 3% down 

        • Fannie Mae HomeReady loan — 3% down 

        • Freddie Mac Home Possible loan — 3% down 

        • Conventional loan with PMI — 5% down 

        • Piggyback loan (no PMI) — 10% down 

        • Conventional loan without PMI — 20% down

      • For more information about HomeReadyTM and Conventional 97, and piggyback loans, contact your mortgage professional. If you’re in Illinois and would like assistance in learning more about mortgages, ask us and we can point you to a few mortgage professional options.

  • FHA - An FHA loan is a mortgage insured by the Federal Housing Administration. FHA insurance protects mortgage lenders, allowing them to offer loans with below-average interest rates, easier credit requirements, and low down payments (starting at just 3.5%). 

    • FHA loans are especially popular with first time, lower-income, and/or lower-credit home buyers, thanks to their flexibility and low rates. But FHA financing isn’t limited to a certain type of buyer — anyone can apply.

    • To qualify for an FHA home loan, you’ll need to meet these requirements:

      • A 3.5 percent down payment if your credit score is 580 or higher

      • A 10 percent down payment if your credit score is 500-579

      • A debt-to-income ratio of 50% or less

      • Documented, steady employment and income

      • You’ll live in the home as your primary residence

      • You have not had a foreclosure in the last three years

    • ​FHA loans usually have below-market interest rates. That means they’re lower, on average, than comparable conventional loans.

    • Note, the APR on an FHA loan is often higher than the APR on a conventional loan. That’s because FHA rate estimates include mortgage insurance, while conventional rate estimates assume 20% down and no mortgage insurance.

  • USDA Loans - USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. USDA loans are available to home buyers with low-to-average income for their area, offer 100% financing with reduced mortgage insurance premiums, and feature below-market mortgage rates.

    • USDA home loans are putting people in homes who never thought they could do anything but rent.

    • USDA loans are special mortgages meant for low- to moderate-income home buyers. These loans are guaranteed by the US Department of Agriculture. That guarantee acts as a form of insurance protecting USDA mortgage lenders, so they’re able to offer below-market interest rates and zero-down home loans. USDA runs this program to encourage homeownership and economic development in rural areas.

    • Insurance - USDA “guarantees” its loan program — meaning it offers protection to mortgage lenders in case USDA borrowers default. But the program is partially self-funded. So, to keep it running, the USDA uses homeowner-paid mortgage insurance premiums.

      • ​As of 2016, this is the current mortgage insurance rates

        • ​For purchases, 1.00% upfront fee paid at closing, based on the loan size

      • As a real-life example: A homebuyer with a $100,000 loan size in Blacksburg, Virginia, would be required to make a $1,000 upfront mortgage insurance premium payment at closing, plus a monthly $29.17 payment for mortgage insurance.

      • USDA upfront mortgage insurance is not paid as cash. It’s added to your loan balance for you.

    • ​Eligibility - USDA eligibility is based on the buyer and the property. First, the home must be in a qualified “rural” area, which USDA typically defines as a population of less than 20,000. Second, the buyer must meet USDA income caps. To be eligible, you can’t make more than 15% above the local median salary. You also have to use the home as your primary residence (no vacation homes or investment properties allowed).

    • Borrowers also have to meet USDA's "ability to repay" standards including:

      • ​Steady job and income, proven by tax returns 

      • FICO credit score of at least 640 (though this can vary by lender) 

      • Debt-to-income ratio of 41% or less in most cases

    • See if a property is eligible for the USDA Loans: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=mfhc

  • VA Loan - VA loans are mortgages backed by the U.S. Department of Veteran Affairs for veterans who have served in the United States armed forces.

    • VA Loan Eligibility for Veterans

      • ​Most veterans must complete a minimum term of qualifying active-duty service to be eligible for a VA loan, though this requirement does have a few exceptions. The minimum term of service varies depending on the dates of that service.

      • Veterans serving from August 2, 1990 through The Present Day

        • ​Veterans who served from August 2, 1990 through the present day must have completed 24 months of continuous service or a full period of at least 90 days during which they were called or ordered to active duty.

      • Veterans serving from September 8, 1980 through August 1, 1990​

        • Veterans who served from September 8, 1980, through August 1, 1990, must have completed 24 months of continuous service or a full period of at least 181 days of active duty. The beginning date that applies to officers for this requirement is October 17, 1981.​

      • Veterans serving from May 8, 1975 through September 7, 1980

        • Veterans who served from May 8, 1975, through September 7, 1980, must have completed 181 continuous days of active duty. The ending date that applies to officers for this requirement is October 16, 1981.​

      • Veterans serving from August 5, 1964 through May 7, 1975

        • Veterans who served from August 5, 1964, through May 7, 1975, must have completed 90 days of active duty. The beginning date that applies to veterans who served in the Republic of Vietnam for this requirement is February 28, 1961.​

      • Veterans serving from February 1, 1955 through August 4, 1964

        • Veterans who served from February 1, 1955 through August 4, 1964 must have completed 181 continuous days of active duty.​

      • Veterans serving from June 27, 1950 through January 31, 1955

        • Veterans who served from June 27, 1950 through January 31, 1955 must have completed 90 days of active duty.​

      • Veterans serving from July 26, 1947 through June 26, 1950

        • Veterans who served from July 26, 1947 through June 26, 1950 must have completed 181 continuous days of active duty.​

      • Veterans serving from September 16, 1940 through July 25, 1947

        • Veterans who served from September 16, 1940 through July 25, 1947 must have completed 90 days of active duty.​

    • Additional eligibility requirements for veterans

      • ​Veterans who were discharged due to hardship, government convenience, reduction-in-force, certain medical conditions or a disability connected to military service can be eligible for a VA loan even if they don’t meet the minimum term of service requirement.

      • Veterans who were dishonorably discharged are not eligible for the VA home loan program.

    • VA Loan Eligibility for Non-Veterans​ - The VA home loan program is available to non-veterans, too. This eligibility class includes certain active military borrowers, their families, and others.​

      • Service members on active duty

        • Active-duty service members can be eligible for a VA loan after they have served 90 days of continuous active duty. Army, Navy, Air Force and Marines are eligible.​

      • Military spouses

        • Some military spouses can be eligible for a VA loan, too.​

        • If the service member to whom the spouse is married is alive, the spouse can be eligible if the service member has been officially declared missing in action (MIA) or a prisoner of war (POW) for at least 90 days. This eligibility is limited to one-time use.

        • If the service member to whom the spouse was married has died, the surviving spouse can be eligible if he or she hasn’t remarried and the service member died on active duty, was a totally disabled veteran or was a veteran who died as a result of a service-connected disability.

        • Spouses who have remarried may be subject to more complicated rules. A consultation with a VA-approved lender may be required.

        • A spouse who obtained a VA home loan with an active-duty service member or veteran who subsequently died can be eligible to refinance that VA loan with a new VA loan at a lower interest rate through the VA streamlined refinance program.

        • The service member's or veteran’s death need not be related to his or her service in this case.

        • Children of active-duty service members or veterans, whether alive or deceased, aren’t eligible for VA loans as a benefit of the parent’s service.

      • Reservists and National Guard members

        • Members of the National Guard and Reserves can be eligible for VA loans if they have completed six years of service in the Selected Reserve or National Guard and they continue to serve in the Selected Reserve or were honorably discharged, placed on the retired list or transferred after honorable service to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve.​

      • Other people eligible for VA loans

        • Individuals who have completed service with certain federal government organizations also can be eligible for VA loans.

        • Examples include cadets at the U.S. Military, Air Force or Coast Guard Academy, midshipmen at the U.S. Naval Academy, World War II merchant seamen, U.S. Public Health Service officers and National Oceanic & Atmospheric Administration officers.

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