When you are considering a mortgage there are many different programs and types offered and suggested online, it can be hard to know which one would work best for you. We created a breakdown to explain what an FHA, VA, USDA, MHP and traditional mortgage loan are and what situation would entail using which one.
So, let’s begin.
Federal Housing Administration (FHA) loans. These loans are made by FHA-approved lenders and are insured by the FHA. These loans are meant to help first time home buyers with not so perfect qualifications become homeowners. Requirements to qualify for an FHA loan include:
- FICO score of at least 580 and a down payment as low as 3.5% on the house (depending on credit score and property type)
- Mortgage Insurance Premium is required
- Debt-to-income ratio up to 55%
- Home must be the borrower’s primary residence
- Steady income and proof of employment
FHA loans allow for down payments as low as 3.5% and with lower FICO score requirements. If you are someone who does not have much available for a down payment with struggling credit or past financial difficulties, an FHA loan might be the best option for you. FHA loans do require a Mortgage Insurance Premium on the loan for the life of the loan if the down payment is less than 10% (11 years if down payment is =>10%) and is required regardless of the loan to value ratio. Where most traditional loans only have Private Mortgage Insurance (PMI) on loans with less than 20% equity. A Mortgage Insurance Premium is different from PMI, it has an upfront premium of 1.75% and an annual premium of 0.45%-1.05%. Also, if you do have a lower credit score, you might also get a higher interest rate. If this is the case, you might want to consider refinancing down the line if an FHA loan is your only option.
Veterans Affairs (VA) Loan. These loans are specifically for Servicemembers, Veterans, and eligible surviving spouses to assist them with becoming homeowners. VA loans are partially guaranteed by Veterans Affairs but distributed through lenders (such as credit unions, banks, and mortgage companies) to give qualified individuals more favorable lending terms. These can include:
- No down payment requirement
- Competitively low interest rates
- Limited closing cost
- No need for Private Mortgage Insurance (PMI) but a funding fee is required at closing
A VA loan has VA specific requirements that can be found on the Veteran’s Affairs website and the same financial requirements of the lender as a traditional loan. The VA office also provides help to qualified service members, veterans and surviving spouses to improve their financial situation to meet the lenders requirements. These loans are a great option for qualified individuals because they might offer better terms than what you might get with an FHA or traditional loan. A funding fee is required at closing at an amount that will vary depending on type of Veteran, loan purpose, property type, and whether first or subsequent use.
United States Department of Agriculture (USDA) loans. These loans have two programs, the first is like the FHA and VA loan where it is guaranteed by the USDA and another program where the loan is issued by the USDA. The USDA loan include the following benefits:
- Zero down payment
- Lower interest rates, USDA issued loans include subsidized interest rates
- Available for homes in rural areas, some suburb locations may be eligible
The loans issued by USDA are specifically for low and very low-income applicants who want to live in rural areas. They include minimal money down and subsidized interest rates. Those that are just guaranteed by the USDA still need to be in rural areas but have less strict income requirements, but you will need to pay a one-time and a monthly mortgage insurance premium with the program equal to 1.00% of the loan amount at closing and 0.35% of the loan amount per month. Requirements for the USDA guaranteed loans programs include:
- U.S. Citizenship or permanent residency
- A monthly payment equal to or less than 29% of your monthly income
- Debt to income ratio at or below 50%
- Income history for 24 months
- A good credit history with no collections activity in the last 12 months (some special circumstances can be waived)
- Credit score of 640 or higher required for standard USDA loans or 600 for streamlined refinances
- Credit score of less than 640 must meet more strict underwriting standards
For USDA issued loans the additional requirements include:
- Does not have “decent, safe, and sanitary housing”
- Unable to get a home loan from traditional sources
- Has adjusted income equal to or less than low-income limits for their area
- Home cannot be larger than 2,000 ft2
These loans are ideal for those who have trouble qualify for other mortgage programs and wish to live in a rural setting. However, applicants will have to have incomes within the USDA’s income limits to qualify. For example, the income limits for programs out of the New Bedford Metro area for 1 person are:
- Grant Income Level = < $17,650
- Very Low Income = < $42,050
- Low Income = < $67,300
- Moderate Income = < $110,850
You can find other area income limits on the USDA website here.
Massachusetts Housing Program (MHP) Loan. Like FHA this program helps first-time homebuyers within certain requirements become homeowners. The requirements for the MHP program include:
- Never purchased a home before
- Take a homebuyer class (must be an approved course)
- 3% down payment on condo, single family or two-family properties or 5% down payment for three-family property
- Household income under limits
- Have less than $75,000 in total household assets
- Credit Score over 640 for single family home
- Home must be primary residence
These types of loans offer:
- As little as 3% down
- Low, fixed interest rates
- No PMI
- Financial assistance for eligible buyers
These loans are good options for those that qualify for this mortgage type and intend to use the home as their primary residence. This is because the MHP program offers lower interest rate than traditional loans and allows for smaller down deposits without having to pay for PMI.
Traditional Loan. This is the standard type of loan offered by lenders. This type of loan is good for those who meet lenders requirements. Unlike an FHA and USDA loan, PMI is only included on mortgages with less than 20% equity. This means if you put 20% down on your house you will not have to pay PMI, and if you put down less you will only have to pay PMI until you pay off 20% of the principal. For example, if you put 5% down on the house, you will only pay PMI until you pay off an additional 15% on the principal and reach 20% equity on your home.
This loan is ideal for those who have the financial ability to put more down on a house and do not qualify for programs such as the MHP program. Typical requirements for a traditional mortgage include:
- Credit score down to 620
- Debt-to-income ratio of below 50%
- Minimum 3% down payment, 20% minimum to avoid PMI for non- first-time homebuyers
- No down payment required for First Time Homebuyers
- Loan below $548,250 or your areas FHFA limits
Lenders will have stricter requirements for low interest rates than FHA, VA, and USDA loans because they are not guaranteed by the government. This means it can be more difficult for someone with a weaker financial situation to obtain a good interest rate on a traditional loan. If you intend to get a loan larger than the conventional loan limit you would want to look into Jumbo mortgages as an option.
To help you decide which program may be best for you, reach out to a financial profession. They would be able to help you see what rates and programs you qualify for to help you weigh your options.
Reach out to a Alltrust Mortgage Professional to learn about the options you have today!
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