When people begin the homebuying process for the first time (or even for repeat buyers), it can feel overwhelming.
Which loan program do I choose? Which one do I qualify for? Where do I start?
Usually, the answers come from a conversation with an experienced mortgage lender. To save you the time, I’ll explain different loan options.
1. FHA (Federal Housing Administration)
An FHA loan is a mortgage that’s insured by the Federal Housing Administration.
The loan has more lenient credit requirements and tends to be more forgiving about credit history with regard to bankruptcy and foreclosures.
The program requires only a 3.5 percent down payment with a credit score of 580 and higher. At least a 10 percent down payment is required for scores under 580. The loan is for primary residences only.
2. Conventional
A conventional loan is a mortgage that is not guaranteed or insured by any government agency.
The conventional loan has stricter credit requirements and most conventional programs want a credit score of 620 or higher. You can expect a down payment of 3 percent to 20 percent.
But if you are putting less than a 20 percent down payment, the loan generally requires private mortgage insurance . The lender may automatically cancel PMI when LTV (loan to value) reaches 78 percent, or 22 percent equity in the property. Loan to value means the amount borrowed in proportion to the original market value (based on lower of appraised value or sales price at time of purchase) of the property.
Homeowners may petition to cancel the insurance by requesting a new appraisal if they believe they now have 20 percent equity in the property based on current market value (e.g.: renovations).
Conventional loans can be applied toward a primary residence as well as second homes and investment properties.
3. Veterans Affairs (VA)
The VA loan is a home-mortgage option available to United States veterans, service members and eligible surviving spouses. VA loans are issued by qualified lenders and guaranteed by the U.S. Department of Veterans Affairs (VA).
In many cases, the buyer will have no down payment if the loan amount is under the county loan limits in your buying area (currently most of Hampton Roads counties loan limits are $458,850).
There is no monthly mortgage insurance, but there is a funding fee, which is a one-time upfront cost on all VA loans paid directly to the Veterans Administration. The funding fee is based on the down payment, how many times you have used the VA entitlement, the kind of loan and the type of veteran you are. There are some instances where borrowers are exempt from paying the VA funding fee.
4. USDA
A USDA loan is a mortgage offered to purchase owner occupied, rural property and is backed by the U.S. Department of Agriculture. The program does have strict income limits based on household size.
The property must be in a rural area designated by USDA. There is zero down payment and a low funding fee (upfront) and monthly mortgage insurance premium.
There are other types of loan programs, some specifically for first time homebuyers. There are grants available to assist with the required down payment and closing costs, and most have household income limits. It’s best to talk to a local lender who knows the available programs to help you purchase a home. Understanding the available loan options before beginning your home search will help you navigate the homebuying process.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake. She specializes in lending for the millennial generation. Sign up today for Shikma’s free webinar, “First-Time Homebuyer Crash Course,” at shikmarubin.com/webinar. You can reach her at srubin@tidewaterhomefunding.com or 757-490-4726.