Conventional Loans
Who they're for: Conventional mortgages are ideal for borrowers with good or excellent credit.
How they work: Conventional mortgages are "plain vanilla" home loans. They follow fairly conservative guidelines for:
- Borrower credit scores.
- Minimum down payments.
- Debt-to-income ratios - The percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
Cost: Closing costs, down payments, mortgage insurance and points can mean the borrower has to show up at closing with a sizable sum of money out of pocket.
Advantages: Conventional mortgages generally pose fewer hurdles than Federal Housing Administration or Veterans Affairs mortgages, which may take longer to process.
Disadvantages: You'll need excellent credit to qualify for the best interest rates.
FHA loans
Who they're for: Federal Housing Administration mortgages have flexible lending standards to benefit:
- People whose house payments will be a big chunk of take-home pay.
- Borrowers with low credit scores.
- Homebuyers with small down payments and refinancers with little equity.
How they work: The Federal Housing Administration does not lend money. It insures the mortgage and the borrower pays a mortgage insurance premium that is added to their monthly payment.
The FHA loan often allows borrowers to have slightly higher debt ratios, utilize gifts for their down payments, have non-occupant co-borrowers such as parents help them qualify, and use alternative forms of credit when a borrower has little or no credit established.
For many FHA borrowers, the minimum down payment is 3.5%. Borrowers can qualify for FHA loans with credit scores of 580 and even lower.
Cost: Each FHA loan has 2 mortgage insurance premiums:
- An upfront premium of 1.75% of the loan amount, paid at closing.
- An annual premium that varies from a low of 0.45% to a high of 0.85%. This premium is rolled into the monthly mortgage payment for the life of the loan.
What's good: FHA loans are often the only option for borrowers with high debt-to-income ratios and low credit scores.
What's not as good: FHA mortgage insurance premiums usually are higher than premiums for private mortgage insurance. To get rid of FHA premiums, you must refinance the loan.
VA loans
Who they're for: Most active-duty military and veterans qualify for Veterans Affairs mortgages. Many reservists and National Guard members are eligible. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.
How they work: No down payment is required from qualified borrowers buying primary residences. The VA does not lend money but guarantees loans made by private lenders.
Cost: The VA charges an upfront VA funding fee, which can be rolled into the loan or paid by the seller. The funding fee varies from 1.25% to 3.3% of the loan amount.
The VA allows sellers to pay closing costs but doesn't require them to. So the buyer might need money for closing costs. Borrowers may also need money for the earnest-money deposit.
What's good: VA borrowers can qualify for 100% financing. Veterans do not have to be first-time buyers and may reuse their benefit.
What's not as good: There are limits on loan amounts. The limits vary by county.