Let’s face it, you have your work cut out for you if you want to qualify for a conventional mortgage. Still, these home loans, which adhere to the underwriting guidelines set by Freddie Mae and Fannie Mac, present the best-value option for the average would-be homebuyer.
But depending on your circumstances, you may be able to qualify for specialty loans that not only have “easier” underwriting guidelines, but also offer specific perks for buyers who meet certain criteria. We look at three of these types of mortgages below.
FHA Loans
FHA loans are mortgages insured by the Federal Housing Administration (FHA) and are popular among first-time homebuyers for their low-down payment schemes and considerably more lenient credit score requirements. In fact, you can expect to put down 3.5 percent of your loan with a credit score above 580 and 10 percent for credit scores between the 500 to 579 range. In contrast, conventional mortgage lenders require at least 20 percent down.
Of course, the FHA isn’t giving away these mortgages to anyone. You still need to meet with an FHA lender to assess your finances and ability to meet mortgage payments. For example, your mortgage payments must not exceed 31 percent of your net income. Likewise, your debt to income ratio must not exceed 43 percent.
Max limits for FHA loans vary by state, so be sure to shop for lenders and see how much can borrow before committing to a home purchase.
USDA Loans
Offered through the United States Department of Agriculture, USDA home loans are designed to increase homeownership in rural and underdeveloped parts of the United States. Don’t let the “rural” requirement fool you into thinking you can only buy a home in a small town in the middle of nowhere. In fact, the USDA considers most areas outside of major cities as rural. You can use this USDA map to determine the zone eligibility of a home you want to buy.
USDA loans are also one of the few mortgages that don’t require a down payment. You will, however, need to prove you don’t have adequate housing but still have sufficient income to cover mortgage payments, insurance, and taxes throughout a 30-year loan period.
VA Home Loans
VA loans are a mortgage option exclusive to veterans, active military personnel, and surviving spouses of veterans. These loans are insured by the U.S. Department of Veterans Affairs, allowing lenders to offer flexible and friendlier terms to borrowers, such as:
- Zero down payment
- No minimum credit score requirement (although lenders have the discretion to set credit requirements for borrowers)
- No mortgage insurance fees, which means lower monthly mortgage payments
The catch, however, is that you can only apply for one VA loan at a time. You need to either pay your loan in full or dispose of the property before being able to qualify once more.
If you want to learn more about these specialty and government-backed loans, get in touch with Chris Lamm for a consultation.