Mortgage 101

What Loan is Best for You?

By Courtney Christensen on June, 17 2020
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Courtney Christensen

Not all loans are created equal. There are dozens of loan programs that you can choose from between purchasing a new home, building one, or refinancing your current home. It all depends on your needs and situation. 

In this article, we will go over the most common loan programs. When you decide it’s time for a mortgage, use this as a guide to speak with your loan officer about which loan will be best for you.

The Conventional Loan

As the most popular loan type, these loans are plentiful. They are not offered by the federal government like most of the loans discussed later in this article, which means there is much less paperwork involved. Conventional loans are only available through private lenders, and the ideal borrower has good credit and plenty of money for a down payment.

Why a conventional loan?

No mortgage insurance. While the most common down payment for a conventional loan is 20%, for just an extra 2% down, you can avoid monthly mortgage insurance which is often required for many other kinds of loans. This insurance can be removed at a later date with a conventional loan, but cannot be removed with other loan types.

Immediate equity. Because conventional loans usually require a 20% down payment, you get instant equity in your home as soon as you sign at the closing table. This will benefit you greatly in the future should you decide to sell your home or refinance.

Faster closing. Without the requirements and paperwork required with government-backed loans, a conventional loan is more straightforward. There are less requirements to cover during the underwriting process which allows for a quick closing. At Ruoff Mortgage, it is about 17 days!

Sellers love it. A buyer with a conventional loan is attractive to sellers because it means you have good financial health. Sellers will often choose these buyers over borrowers of a government loan since the process is simpler and faster.

The FHA Loan

The FHA loan is designed for homebuyers with low-to-moderate income. They are a great option for many people, but especially for first-time homebuyers or repeat buyers with low income or credit. Qualified homebuyers benefit from a lower down payment requirement (as low as 3.5%), lower monthly premiums, and lower closing costs.

Why an FHA Loan?

Low down payment. A down payment on an FHA loan can be as low as 3.5% as long as you have a credit score of 580 or higher. If your credit score is lower, a 10% down payment may be required, but this is still much lower than a conventional loan.

Low credit requirements. Borrowers of conventional loans typically need a credit score of 620 or higher, but with an FHA loan the minimum is 500. FHA loans offer some of the lowest credit requirements of any loan program.

Flexible debt-to-income ratio. A debt-to-income ratio (DTI) is the ratio of your income (your salary plus any salary of others on your home’s title) to the amount of debt you have from credit cards, student loans, car payments, or child support. It is a big factor in determining how much of a mortgage you can afford. With an FHA loan, borrowers can have monthly debt payments that cover up to 50% of their income – much higher than other loans.

Low cost mortgage insurance. Some loans require mortgage insurance which mitigates risk to lenders for borrowers who provide a low down payment on their home. For borrowers with an FHA loan, they must pay mortgage insurance on loans with a 10% down payment or lower. This insurance cannot be canceled, but it is often lower than traditional mortgage insurance.

The USDA Loan

USDA loans make it possible for families living in specific areas purchase their dream home. While typically considered loans for people in rural areas, a much larger percent of the country is covered under this loan. With 100% financing through Ruoff Mortgage, qualifying homebuyers do not have to put anything towards the down payment on their home.

Why a USDA loan?

No down payment. Many lenders will fully finance your new home with a USDA loan. With no down payment and closing costs rolled into your mortgage, you can move into your home without paying a dime upfront.

Credit flexibility. The USDA loan allows for flexibility in your credit score and credit history. It means you can use alternative documents like subscriptions, rent, and monthly bill payments to create a credit history.

Low PMI. If you do decide to take advantage of the 100% financing and do not provide a down payment, you will be required to pay monthly mortgage insurance. However, USDA loans typically have the lowest insurance rates currently available.

Low income limit. The USDA loan is great for homebuyers who have a low to medium income. USDA loans take into account homebuyers who have an income of up to 115% of the average income in their area.

The VA Loan

Guaranteed by the US Department of Veteran Affairs, a VA loan is available to eligible veterans and their families. A VA loan often has lower closing costs and more liberal terms and requirements. Interest rates can often be negotiable. Qualified homebuyers must receive a certificate of eligibility from the US Department of Veteran Affairs for this loan.

Why a VA loan?

No down payment. Like a USDA loan, a VA loan can also be fully financed by your lender. With no down payment required and low closing costs, you can move into your home without a large payment upfront.

No mortgage insurance. A VA loan is unlike most other mortgages in that it doesn’t require mortgage insurance. This includes whether you provide a large down payment or none at all.

High maximum loan amount. With many government backed loans, the maximum loan amount is capped relatively low. Not so with a VA loan. This loan allows you to purchase a home worth over $400,000 without an issue. You will need to check with your lender to find your county’s limit.

Government guarantee. The US Department of Veteran Affairs has your back. If you are unable to make monthly payments, you may qualify for assistance from the VA.

The Renovation Loan

Want to buy a fixer-upper? A renovation loan gives you the opportunity to buy a home in need of repairs or updates. The improvements can be as simple as a new roof or as complicated as adding a whole new room. Your loan and the value of the property will be based on the value of the home after the repairs are completed. This means you can gain instant equity in your home.

Why a renovation loan?

Certified contractors. Most renovation loans require certified contractors to complete the projects on your home. This is to ensure that the home meets the terms set by the individual loan you choose.

One-time close. Renovation loans are offered with a single closing, even if there is major construction involved in the renovation. This is unlike new construction loans which often require two separate loans and two separate closings. You will only have to pay closing costs and sign paperwork once with a renovation loan.

Credit flexibility. No matter what your financial health looks like, you can probably get a renovation loan. Like an FHA loan, your credit score could be as low as 500.

When researching the right loan for you, remember to include you loan officer! They will be able to answer your questions and give you advice based on your own unique situations.