Mortgage Programs: Understanding Your Options

Before you enter into a purchase agreement to buy your next home, it would be in your best interest to find the most beneficial mortgage program for you and your family. The intricacies of each mortgage type may be overwhelming, but with a little research and advice from a knowledgeable loan officer you should be able to find a mortgage program that will give you and your financial situation the greatest benefits. Down payment, interest rate, loan term, and private mortgage insurance all describe a mortgage, but understanding how guidelines differ from mortgage program to program will help you find the most advantageous aspects of each loan type and the easiest path to approval. Below is a list of the four main mortgage types, they include: conventional, Federal Housing Administration (FHA), Veterans Administration (VA), and the United States Department of Agriculture (USDA). As you sift through the guidelines of these mortgage types, you will find that the down payment, credit score, employment history, co-signer options, and property condition requirements vary greatly.

Conventional Mortgage

In general, conventional mortgage programs have the most stringent qualification standards of the four main loan types. They require the highest credit score, strongest employment stability, and down payment requirements. This loan type requires a minimum 3% down payment, but offers great flexibility with private mortgage insurance. If you have less than a 20% down payment, this loan type offers lender paid mortgage insurance. This option will help you lower your monthly mortgage payment. For second time home buyers or individuals with strong credit and significant down payments, this is typically the best mortgage option. If you have less than 20% down and less than perfect credit, you will likely pay a substantially higher interest rate than the other mortgage types.

Federal Housing Administration (FHA)

An FHA mortgage loan offers the most flexibility for individuals with lower credit scores or if they are recovering from a prior bankruptcy, foreclosure, or recent derogatory credit. This loan type requires as little as a 3.50% down payment, but has a monthly mortgage insurance premium of.85% annually for the life of the loan. It also requires upfront mortgage insurance of 1.75% of the mortgage, which is typically financed (added) to the mortgage balance at the time the loan is closed.

Veteran’s Administration (VA)

This loan type is available only to veterans and surviving spouses of deceased veterans. If you qualify for this mortgage program and have less than 20% down, this is likely the best option available to you. It offers highly competitive interest rates, requires no down payment, and no monthly mortgage insurance. An upfront VA funding fee is typically added to the mortgage at closing.

United States Department of Agriculture (USDA)

This loan type is only available in certain designated locations in rural areas. The borrower must also meet certain income restrictions to qualify. The benefit of this loan is that it requires no down payment and it allows closing costs to be rolled into the loan up to 3% of the sales price depending on the appraisal value of the home. This mortgage option also requires an upfront guarantee fee of 2.75% of the sales price, which can be added to the principal amount of the mortgage. In addition, there is a monthly mortgage insurance premium, which equates to.5% annually.

Prior to entering into an agreement to purchase your next house, it is in your best interest to contact a licensed and experienced loan officer to pre-approve you for a mortgage. During the pre-approval process, discuss your mortgage options with your loan officer to find out which loan type is the most beneficial for you and your family.

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