[Replay] Deciphering Mortgage Loan Options, Part II

March 1, 2022 by gjsturm88 1 Comment

For those with the New Years Resolution to purchase a new home in 2022, we’ll revisit some of our past posts on the Five C’s (criteria that lenders use), and different mortgage loan options. This week, we’ll continue our discussion on different mortgage loan options.

This week we’ll continue our discussion about different mortgage loans and talk about the pros and cons of conventional and FHA mortgages.

Let’s start with conventional loans. There are a number of benefits to conventional loans – unlike certain government-backed loans, conventional loans are not limited based on location, occupation, maximum income, or maximum loan amount, and they are one of the few mortgage types that are eligible for properties that will not be your primary residence, such as rental or investment property. Also, if you have 20% equity in the house, you are generally not required to have mortgage insurance, which is an insurance policy that covers your lender in case you default. Not having to pay for mortgage insurance helps to lower your monthly mortgage payment.

However, there are downsides to conventional loans as well. Conventional loans are often the strictest in terms of credit score and debt-to-income ratio, which is your monthly debt obligations divided by your gross monthly income, and often require larger down payments than certain government-backed loans.

Next up are FHA loans – FHA loans have quite a few benefits; for instance, they generally have less stringent requirements than conventional loans when it comes to credit scores and down payments. Homebuyers with a FICO credit score of at least 580 generally only need to make 3.5% down payments, and homebuyers with a FICO credit score between 500 and 579 generally only need to make 10% down payments. FHA loans are often more flexible when it comes to debt-to-income ratios as well. FHA mortgages allows homebuyers to use 31% of their income towards housing costs, which is referred to as the front-end debt-to-income ratio, and 43% towards their combined housing expenses and other long-term debt, or back-end debt-to-income ratio. These are generally higher debt-to-income ratio than allowed with conventional loans. Also, FHA loans, unlike VA loans, are not restricted to members of the military community, and unlike USDA loans, there are no income limits nor any requirements in terms of rural locations.

There are downsides to FHA loans, however. FHA mortgages must be for the borrower’s primary residence, so FHA loans cannot be for investment or rental property. Also, there are limits to how large the mortgage can be. For instance, in Gloucester, Virginia, a single-family FHA mortgage cannot be for more than $485,000. Lastly, FHA loans have required mortgage insurance premium that, unlike conventional loans, must be paid through the life of the loan with only a few exceptions. One of those exceptions – if you make a down payment of 10% or more, you may be eligible to waive the mortgage insurance premiums after 11 years of payments.

We’ll return next week with the pros and cons of VA and USDA mortgages!