Types of Mortgages: What works best for you?
There are 3 basic types of mortgages: conventional, FHA and VA. Each type has variations and each offers different advantages to buyers.
Conventional mortgages have no restrictions on job type or military service, everyone can use this type of mortgage. Conventional mortgages are typically the type buyers think of when they think of a 20% down payment but you can put down as little at 5% with excellent credit and low debt ratios. These mortgages have no limitation on how much you can borrow, interest rates are higher for bigger loans.
These loans have the most risk to the lender, there is no governmental agency that backs the loan, so only borrows with the very best credit can usually qualify. Lenders will usually loan with credit scores at 680 and above but some lenders require 720 credit scores as the minimum. I have also seen some flexibility on debt ratios for these loans with well qualified borrowers getting loans with 45% debt to income ratios.
With a 20% down payment, borrowers avoid Mortgage Insurance but with conventional loans the MI is lower than with other loan types.
FHA mortgages used to be the way to get your first mortgage for many first-time buyers but now we see borrowers of all types using FHA loans. FHA mortgages are backed by the government so lenders are willing to make loans for borrowers with a less than stellar credit history. FHA will back mortgages for borrows with credit scores as low as 580 but most lenders require a 620 credit score as the minimum. Borrowers who lost their homes to short sales or foreclosure can often obtain an FHA loan within just 1-2 years of the loss of the home, you must have rebuilt your credit. FHA also has a limit on the price of the home. Currently in San Diego County that is $625,500.
All FHA loans have some type of mortgage insurance. The amount of your down payment dictates how much and how often you will pay for mortgage insurance. If your down payment is 20% or more you can pay a single MI premium at the time of purchase and you will have no further MI premium. If you put down 10% then you will have both an upfront premium paid at the time of purchase and then monthly premiums for 11 years. If you put down less than 10% you will have upfront premiums and monthly premiums for the life of the loan.
VA loans are by far the best mortgage available for borrowers but you must qualify for the loan. Most often military service will qualify you for the program. VA borrowers have the best repayment record of all borrowers. The loans have backing so lenders usually welcome VA borrowers easily.
VA loans have their own interest rates and as of today those rates are lower than conventional mortgages. VA loans have a form of mortgage insurance that is paid one-time at the close of escrow. There are no monthly MI payments with VA loans. There are also limits to the closing costs VA borrowers can pay to purchase a home. While these are nice advantages to the VA borrower, sellers are on the hook for closing costs the VA buyer can’t pay. As a consequence some sellers won’t accept VA buyers so having an experienced VA lender is a huge asset when shopping for a home.
As I mentioned, there are loan programs for just about everyone. The costs and requirements for each vary so shopping for a mortgage is an important first step in your home buying process. For a list of experienced lenders in the San Diego area pop me a note.