Wondering what kind of loan is best for you? Here’s a breakdown.
Remember, Regal The Property Shoppe and our lending experts are here to help.
A conventional loan is a mortgage that is not guaranteed or insured by any government agency. It is typically fixed in its terms and rate. Conventional home loans include:
- Conforming loans
- Non-conforming loans
- Jumbo loans
- Portfolio loans
- Sub-prime loans
About half of all conventional loans are called “conforming” mortgages, because they conform to guidelines established by Fannie Mae and Freddie Mac. These two government-sponsored enterprises (GSEs) buy mortgages from lenders and sell them to investors. Their purpose is to make mortgages more widely available. All conforming mortgages are also conventional mortgages.
Loans that do not conform to GSE guidelines are referred to as “non-conforming” home loans. Non-conforming loans that are larger than loan limits set by the GSEs are often referred to as “jumbo” mortgages. All non-conforming mortgages are also conventional mortgages.
Conventional loans held by mortgage lenders on their own books are called “portfolio” loans. Because lenders can set their own guidelines for these loans and do not sell them to investors, these products may have features that other mortgages do not. For example, a portfolio lender might allow a borrower to use investments like stocks and bonds as security for a mortgage for which she would not otherwise qualify.
Conventional home loans marketed to borrowers with low credit scores are called sub-prime mortgages. They typically come with high interest rates and fees. The government has created special rules covering the sale of such products, but they are not government-backed — they are conventional loans.
Minimum Down Payment
The minimum down payment requirement for an FHA mortgage is 3.5 percent if the borrower has a credit score of 580 or higher. Borrowers with scores between 500 and 579 must put at least ten percent down.
Types of Loans
FHA also insures loans for home rehabilitation and improvements. The loans cover the cost of the property, plus home improvement expenses. FHA also backs manufactured housing loans and reverse mortgages for seniors called Home Equity Conversion Mortgages, or HECMs.
A VA loan differs somewhat from a standard mortgage. Even though it is provided through a private lender, the federal government guarantees a portion of the principal. That means that the Department of Veterans Affairs backs the loan, so if the borrower defaults on it, the lender is protected. Borrowers who are eligible for a VA loan are permitted to have a small, or sometimes non-existent, down payment and still get a mortgage. This is the biggest advantage of a VA loan. Be sure to ask your lender what its down payment requirements are when requesting a VA loan.
Some of the requirements for a VA loan are standard, as with any loan: good credit, enough funds for payments, etc. For example, there is a minimum credit score requirement, as well as income requirements for getting a VA loan. You must also be eligible though your affiliation with the military. To see a full list of eligibility requirements, visit the Department of Veterans Affairs website. This site also answers many specific questions about the program.
Certificate of Eligibility
When requesting a VA loan, you need a certificate of eligibility to show the lender. You can get this certificate through the Department of Veterans Affairs. Upon providing it to the lender, the lender can then help you.
The good news is that the USDA loan is widely-available. 97 percent of the geographic United States is in USDA loan-eligible territory.
Yet, if you’re like most U.S. consumers, it’s a program you’ve only just learned about. This is because the USDA loan program wasn’t launched until the 1990s. Only recently has it been updated and adjusted to appeal to rural and suburban buyers nationwide.
Using a USDA loan, buyers can finance 100% of a home’s purchase price while getting access to better-than-average mortgage rates. This is because USDA mortgage rates are discounted as compared to rates with other low-downpayment loans.
Beyond that, USDA loans aren’t all that “strange”.
The repayment schedule doesn’t feature a “balloon” or anything non-standard; the closing costs are ordinary; and, prepayment penalties never apply.
The two areas where USDA loans are different is with respect to loan type and downpayment amount. With a USDA loan, you don’t have to make a downpayment, and you’re required to take a fixed rate loan. ARMs aren’t available via the USDA rural loan program.
Rural loans can be used by first-time buyers and repeat home buyers alike. Homeowner counseling is not required to use the USDA program.
Private money lenders exist throughout most of the United States, seeking a chance to earn above average rates of return on their money. With that comes the risk that a private money loan may not be re-paid on time or at all without legal action. However, in the case of a real estate transaction the lender can ask for a deed on the property in their name & insurance on the property the same as a bank lending money would require as collateral to help insure they be repaid in the event of a default on the loan or catastrophe to the property. In that case the lender gets the property and can sell it to recoup their investment. Private money is offered to clients in many cases in which the banks have found the risk to be too high or credit too poor. There are a few private money lenders who offer a no credit check and loan amortization.
How to Access Funds from a Reverse Mortgage
Reverse mortgage funds can be dispersed in three ways: either as monthly installments, a line of credit or one lump sum. Borrowers can also receive their funds through a combination of monthly installments and a line of credit. With the line of credit, you are only charged interest on the funds that you use, similar to a home equity line of credit or a credit card.
The amount of money you can access depends on how much equity you have available in your home, your age and your interest rate. During the first year of your reverse mortgage loan, you can take out 60 percent of those funds.
Paying Back a Reverse Mortgage
Since most reverse mortgages are backed by the Federal Housing Administration, or FHA, the loan is not due back until the borrower either moves out of the home, sells the home or passes. Borrowers are required to keep up with the maintenance of the home and pay their property and homeowner’s insurance. If they fail to do so, the loan can become due immediately.
If you pay back the loan by selling your home, any leftover money will go to you or your heirs.
Factors to Consider Before Applying for a Reverse Mortgage
Reverse mortgages typically come with a higher interest rate than a traditional mortgage. As with any financial decision, it’s important to do your research and decide what would be the best option for your personal situation. A few things to consider include:
How you’ll use the money:
Do you need an extra source of income every month, or are you just wanting to go on an exotic vacation? Depending on your need, there could be a better solution, such as a home equity loan or personal loan.
If you plan to leave your home to your heirs:
If you want to leave your home to your children, a reverse mortgage could jeopardize that. When you pass, you’ll have to pay back the loan either by selling it or having your heirs pay it back.
Where your partner will live if you pass first:
If you want your partner to be able to continue living in the home if you were to pass first, make sure to have them as a co-borrower on the reverse mortgage. This will allow your partner to continue living in the home until he or she passes, too.