No matter whether the buyer is a first-time home purchaser or a veteran of several past transactions, chances are they will need to make a decision about the type of home loan they will use. But not all home mortgages are the same and prospective buyers who take the time to make sure they are choosing the right one for their current situation can save money and enjoy a better overall home buying experience.
Understanding the Conventional Loan
One of the most common types of home loans, the conventional mortgage uses relatively conservative guidelines for applicants. While individual rates for this type of loan can vary, depending on the lender and other factors, applicants will generally be required to have:
- a stable income
- acceptable debt-to-income ratios
- acceptable credit scores (Fannie Mae currently requires a credit score of 580 or above)
- a down payment (twenty percent down is recommended, although smaller down payments are sometimes accepted with the purchase of private mortgage insurance, known as PMI)
Conventional home loans are usually sold on the secondary market, so they must also conform to current home loan lending limits.
When to opt for an FHA Loan
The Federal Housing Administration (FHA) home loan program requires more documentation and a more stringent appraisal and inspection process than a conventional home loan. A common misconception is that FHA home loans are limited to first-time buyers. Actually, any home buyer can apply for an FHA home loan as long as the home being purchased will be their primary residence and they meet the FHA program qualifications.
Benefits of an FHA home loan can include:
- the ability to apply with lower credit scores than those needed for a conventional loan
- smaller down payment requirements
- a more forgiving attitude toward past credit issues, including bankruptcy or foreclosure
- the possibility of using a co-borrower and blended credit scores, in some instances, in order to qualify for the loan
FHA loans are assumable, which can be a real benefit to home buyers who know they will need to sell the home they are buying within a few years of the purchase.
What to Know About the VA Home Loan
The VA home loan, backed by the Veterans Administration, was developed to help ease the home buying process for members of the military. Much like the FHA home loan, the VA loan process requires more documentation and processing. The benefits, however, usually outweigh the slightly longer closing times that may be needed to complete a home purchase with a VA mortgage. When considering a VA home loan, potential applicants should know:
- not all lenders are approved to issue VA loans, so always start by choosing a reputable VA-approved lending source
- they will need a Certificate of Eligibility (COE) proving they are eligible for VA home loan benefits (VA-approved lenders can assist with this process)
- they will need proof of service, such as DD Form 214, NGB Form 22, Report of Separation and Record of Service, NGB Form 23, Retirement Points Accounting or other proving documentation deemed acceptable by the VA
- the home being purchased will be required to pass a VA appraisal process
Major benefits that come with using a VA home loan include the ability to purchase a home with no down payment, lower fees, and no requirement for private mortgage insurance.
Buyers who would like to learn more about their best options for a home mortgage should speak with a reputable lender and their trusted real estate professional as early in the buying process as possible. This step is especially important when buyers are looking at a particular type of home that may be better suited for a certain type of home mortgage.
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