What type of loan are you going to use to purchase a home? Different loan products come with different benefits, so today, I’ll go over a few different options: FHA, VA, USDA, and conventional loans.
Of course, the loan that you go with depends on your individual situation.
Two common loan options are conventional and FHA loans. Conventional loans require 3% down and FHA requires 3.5% down. So, the conventional loan does have a slightly lower down payment. However, in order to qualify for the 3% down conventional loan, one of the parties involved in the transaction has to be a first-time homebuyer. Otherwise, you will have to go with a 5% down conventional loan.
With FHA, it doesn’t matter if you are a first-time homebuyer or not. You just have to purchase an owner-occupied home. In other words, you have to plan on living in the property; you cannot use an FHA loan for an investment property.
How do you know if you should use an FHA loan or a conventional loan? There are a few limiting factors to consider.
For example, if you get your income from a regular job and you do some additional work on the side, that side work might not be usable when your lender determines your debt-to-income ratio. For conventional loans, your debt-to-income ratio needs to be between 43% and 45% to qualify. For an FHA loan, you can have a 50% to 55% debt-to-income ratio.
In other words, if you want to buy a particular home and you are a first-time homebuyer, you might be able to go with the 3% conventional loan and afford a $200,000 house. If the house you’re looking at is $225,000, you might decide to go with the FHA loan because you can get the property with a higher debt-to-income ratio.
You should also know that FHA loans come with mortgage insurance premiums that you have to pay for the life of the loan. Private mortgage insurance premiums also come with conventional loans, but you don’t have to pay them once you pay the house down to approximately 79% of loan to value.
If your debt-to-income ratio is low enough, I would recommend going with the conventional loan. If it’s not, then FHA might be the way you want to go.
There are a few other loan options available to homebuyers. For instance, the VA loan is available to veterans who have an eligibility certificate form from the VA. This loan allows those who have served our country to buy a home with no money down.
The USDA loan is another loan product that does not require a down payment. However, that loan has more to do with where the house is located, as you cannot get a USDA loan in certain areas. If you are interested in this type of loan, you need to make sure that it is within the USDA footprint, which are in more rural areas.
Like conventional loans, the USDA loan also operates with a lower debt-to-income ratio, which means that you cannot get a USDA loan with a debt-to-income ratio of 55%.
If you have any other questions about these loan programs or you would like to learn more about buying a home, give me a call or send me an email. I would be happy to help you!