If there is anything at Bungalo that we take particular pride in, aside from our Bungalo Certified guarantee, it’s the fact that we provide buyers (and sellers, for that matter) with a plethora of options. From a wide variety of newly built and renovated listings to the ability to finance with any mortgage lender under the sun, Bungalo aims to make the biggest financial decision of your life the easiest.
And when it comes to actual home loans themselves, no one lender holds more weight than another, provided you have an official preapproval letter.
You may wonder: What type of mortgage loans are available? How much do you need for a mortgage down payment (hint: It’s not always 20%, despite what you may have heard)? How does an FHA loan differ from a USDA loan or a VA loan? Let’s get to the bottom of these and a few other common questions that pertain to loan products.
What types of mortgage loans are out there?
Because there are so many kinds of home buyers — e.g. first-time, repeat, veterans, downsizing, retirement, renovating, investors, etc. — home loans are designed to fulfill the needs of all those who are in the market. Here are just a few of the more popular mortgages that most mortgage lenders offer. This list is by no means exhaustive:
- Fixed rate
- Adjustable rate
While most of the aforementioned are specific loan programs — an FHA loan is ideal for first-time buyers or who can’t afford a 20% down payment, while a VA loan is for active duty and career retired service members — some refer to how the interest rate is applied to monthly payments. For example, someone who takes out an FHA loan may at the same time have a fixed rate mortgage with a 30-year loan term — or an adjustable rate mortgage with a five-year loan term.
Confused? Don’t be. We’ll talk more about how a fixed rate mortgage differs from an adjustable rate mortgage in our “important questions to ask” section. Your loan officer will also be able to answer your more specific or general questions, but you can use this article as a primer or refresher. You may want to look over our frequently asked questions section as well, as some of the queries there pertain to financing.
What are the different types of mortgage programs?
1. FHA Loan
The “FHA” in FHA stands for the Federal Housing Administration of the U.S. government. One of the more common loan programs available, an FHA loan is popular among first-time homebuyers because the qualification standards aren’t quite as stringent as other mortgage products. This is made possible by the FHA because the agency insures the loan offering. In other words, if for some reason the borrower is unable to pay off the loan in full, it’s backed by the FHA — the department will make the lender whole.
Here are a few of the favorable terms among FHA loans that make them so attractive to buyers who are new to the home marketplace:
- Down payments can be as low as 3.5%
- Borrowers don’t need a sterling credit score
- Competitive interest rate terms
- Loan limits generally range between $356,362 to $822,375
It’s worth noting that an FHA loan borrower may need to come up with a larger down payment than 3.5% of the home’s price if their credit score is too low. For example, if it happens to be lower than 580, they may still be approved, but the trade-off is having to come up with more money upfront, usually as much as 10% of the house’s list price, assuming the FICO score is between 500 and 579. This isn’t necessarily a bad thing, though. With more of the FHA loan repaid to the mortgage provider, the less the monthly loan repayment amount will be.
You can visit the Consumer Financial Protection Bureau’s website for more details on FHA loans. If you’re interested in FHA financing and want to confirm that it’s the best option for your needs, please don’t hesitate to let us know. We’re a click or call away.
2. Conventional mortgage
Unlike the FHA loan or VA loan programs, which are insured by the government, conventional mortgages are backed by private lenders. For this reason, a conventional mortgage can be a bit more difficult to gain approval, depending on the standards of the mortgage provider and the financial situation of the person who is seeking this loan.
These points help to illustrate what we mean by the word “difficult”:
- Borrowers usually need a credit score that is 620 or higher
- Down payments less than 20% will trigger the need for mortgage insurance
- Debt-to-income ratio must usually be 36% or lower
- Loan limits for conforming loans can’t be any higher than $484,350 in most counties
Conventional mortgage terms are largely influenced by whether they’re conforming or non-conforming. A conforming loan means that the rules and regulations pertaining to eligibility and how much you can borrow are determined by Fannie Mae and Freddie Mac, which are government-sponsored enterprises overseen by the Federal Housing Finance Agency. A non-conforming loan has no such standards in place. Thus, the terms can vary broadly, and those approved for a non-conforming loan may be charged higher interest rates. But once again, what that interest rate actually is depends on the financial situation of the borrower. A lower interest rate is possible with a strong credit score.
But when comparing a conforming loan to a non-conforming loan, the conforming loan is usually easier to gain approval (the key word here is usually).
Check out the Consumer Financial Protection Bureau’s website for more information on conventional mortgage idiosyncrasies and how a conventional conforming loan compares and contrasts with a conventional non-conforming loan.
3. Jumbo loan
When you’re looking to buy a house whose price exceeds the conforming loan limit, a jumbo loan may be appropriate. Many properties on the market these days can be quite pricey, as you’ve undoubtedly observed. But if you match a jumbo loan lender’s eligibility requirements, it may be the answer; they’re designed to finance properties that are selling at $548,250 or higher (in most counties). By definition, a jumbo loan is a non-conforming loan.
Yet because there is more risk involved for the mortgage provider loaning the money, a jumbo loan can be harder to get than others. Take a look:
- Borrowers frequently need a credit score of 700 or higher
- Down payments must usually be at least 20% of the home’s value
- Debt-to-income ratio that’s no higher than 43%
- Borrowers may need to show they have substantial savings or assets, enough to cover several months of mortgage payments
Because the underwriting standards are on the stricter side, the interest rate may be lower in comparison to other types of loan products where eligibility is more relaxed.
4. VA loan
If you served or are serving in any of the armed forces, there may be a VA loan with your name on it. Backed by the Department of Veterans Affairs, the VA loan program has helped millions of active duty and career-retired service members become homeowners since 1944, when the program became available. According to the National Association of Realtors, while some of the nation’s service members opt for a conventional mortgage, the vast majority of military members — 77% — buy with a VA loan. There are many reasons why, but perhaps the most attractive aspect is borrowers don’t have to come up with a down payment. That’s an enormous perk.
Of course, VA loans are exclusive to military members and their spouses. But beyond that, the eligibility criteria is pretty straightforward:
- No minimum credit score
- Standard VA loan limit is $548,250 in most counties
- House must be used as a primary residence
- Applicants need to obtain a VA certificate of eligibility
Just because you don’t need to come up with a down payment doesn’t mean you shouldn’t. Even a small down payment of a few thousand dollars can help you reduce your monthly loan repayment bill. Additionally, while there is a tremendous amount of affordability with a VA loan, they do require you to pay a VA loan funding fee. This is another reason why you may want to consider making a down payment, as it can diminish the VA loan funding fee amount.
Be sure to visit the VA’s website to learn more about the VA home loan program and how to apply.
5. USDA loan
You don’t necessarily need to don military fatigues to qualify for a home loan program with zero down payment. Made possible by the Department of Agriculture, the USDA loan program is designed for homeowners that seek the countryside rather than the city. In other words, the property must be somewhere that is considered rural and/or participating in the USDA Rural Development Guaranteed Housing Loan Program. (Although not technically rural, some suburbs are under the umbrella of the USDA initiative.)
There are also income limits for those seeking to apply, meaning you can’t be earning more than a certain threshold in yearly salary. That amount varies by state and county and is also influenced by family size. Here are some of the other important factors relating to eligibility:
- House must be used as a primary residence
- Applicants must have an adjusted income that matches or is lower than the income limit in their county
- Credit scores of 640 or higher are preferred
And that’s just barely scratching the surface. Going with a USDA loan can be a smart option, but because the program is highly regulated and the list of what it takes to qualify is extensive, a USDA loan tends to be harder to obtain.
Key questions to ask
What we’ve discussed will hopefully give you more direction as to which loan option is right for you. But if you’re still unsure, talk to your loan officer. These are some of the questions that they may ask to find the right fit:
- Do you plan to move within a few years or stay put?
- How much home can you afford?
- Are you interested in renovating?
- Is this your first time buying?
- Do you prefer to spend the same monthly loan amount?
The first and last questions relate to interest rates. With a fixed interest rate, you pay the same amount in interest each month over the life of the loan. With an adjustable rate mortgage, the monthly amount is subject to change. It may go down, it may go up. But generally speaking, those who are thinking about moving may find an adjustable rate mortgage to be preferable and may make more sense financially.
Speaking of interest, no matter what loan you go with or which mortgage lender you choose, it’s important to select one that’s in keeping with your best interests. That’s why it pays to go with Bungalo. While we aren’t a home lender, we work with all of them. Additionally, instead of dealing with other potential suitors for a property, you can simply submit your offer online for a no-hassle home buying experience. And because every home we sell is Bungalo Certified, you can rest assured that it’s move-in ready, having undergone a rigorous home inspection — typically more than one.
For more information on why home buying is better when it’s done with Bungalo, contact us. And visit our blog as well for home owning and selling news you can use.
This article is meant for informational purposes only and is not intended to be construed as financial, tax, legal, real estate, insurance, or investment advice. Bungalo always encourages you to reach out to an advisor regarding your own situation.