There are a lot of options for a potential homebuyer, and it’s important to understand the different benefits of the various types of mortgage loans before making your final decision. It can sometimes seem a little overwhelming when you start looking at all the alternatives, but if you understand some of the basics, you’ll have a good idea where to start the loan process.
A VA home mortgage is only available to buyers who served or are currently serving within the U.S. military. These loans are administered by the U.S. Department of Veterans Affairs, but that doesn’t mean that the VA actually loans the money. They simply back the loans made by individual lenders to the veteran.
Qualified veterans may be able to purchase a primary residence with no money down as long as the final purchase price isn’t higher than the appraised value of the property. The veteran will still need to have a qualifying income and credit score, but lenders are usually more willing to work with the homebuyer because they have the VA backing up the final loan amount. It is also important to note that while private mortgage insurance is not required the VA does charge an upfront funding fee, which can be rolled into the loan or paid by the seller.
An FHA loan is very similar to a VA loan in that it does not actually lend money but provides backing in case the borrower ends up defaulting on the loan. It is one of the fastest growing loan programs right now because many lenders are more willing to consider making the loan in spite of a less than stellar credit rating. It also requires a very low down payment (as low as 3.5%), and there is no minimum credit score.
You need to be aware that you will have to deal with upfront mortgage insurance premiums as well as some ongoing premiums that can increase the overall cost of the loan. Still, this is a great option for borrowers who don’t have a lot of money to make a big down payment or have an imperfect credit history.
Conventional loans use the Fannie Mae and Freddie Mac guidelines for conforming loans and are usually $417,000 or less for a single family home. There are some very definite guidelines for credit scores, income requirements, and down payments (which can range anywhere from 5 to 20%). The most attractive part of a conventional mortgage is simply that you will be able to avoid a lot of the bureaucracy that comes from working with the FHA or VA, and, since they require higher down payments, you can usually build up equity more quickly. You will, however, need to have a relatively good credit history in order to qualify and get the best interest rates.
A jumbo mortgage is any single loan amount that goes over the conforming loan limit set by Fannie Mae or Freddie Mack. These loans are not backed by said organizations so they must look to outside investors. These loans can be very risky since they are usually tied to luxury residences and involve much higher loan amounts.
You will need to have an incredible credit rating to qualify for a jumbo loan as well as an established relationship with your lender. You can also expect to be required to put up a large down payment and the interest rate will likely be higher as well. Basically, these are loans meant to help high-income homebuyers afford a luxury home.
Balloon mortgages are intended to be short term loans that carry lower than average interest payments. This is only possible because the loan does not fully amortize over its term. In other words, at the end of the 15 year term, you will still be facing a lot of debt that must be paid all at once. This balloon payment can be rather large, so it is assumed in most cases that the borrower will either refinance or be out of the house before the end of the balloon.
*Loan subject to credit approval. Restrictions apply. Rates subject to change at any time.