There are many types of mortgage loans, each with its own basic criteria that can be tightened by individual lenders. The four basic ones are:
These are the loans most often quoted in the media. The media talks about the most common type of conventional loan, requiring 20% down. In Southern California, this is a difficult if not impossible loan for a first time buyer. Having 20% of a $450,000 home (minimum price of a first house) would be $90,000 for a down payment. Thus there are other Conventional loans that accept a much smaller down payment. As little as 3%, or $13,500 in this example. The big advantage of a Conventional loan is that at 20% down, there is no mortgage insurance required.
If you put down less than 20% (e.g.3%), you can request the mortgage insurance be removed once your equity in the home reaches 22%. In this example, mortgage insurance can be over $300 per month. So this is a huge advantage in the future. The drawback is your credit needs to be very good. There must be no blemishes in recent years. These days the typical credit score needed is 640. There some lenders who will accept 620.
FHA loans were created to fill the needs that conventional loans do not address. Those who had a financial setback a couple of years ago and have since made up for it. The credit score has to be 580 or better. They show a steady track record of on-time, in-full payments on existing debts. If so, they may qualify with a letter of explanation addressing the circumstances of the prior setback. The minimum down payment is 3.5%. Mortgage insurance is significant. There is an upfront portion (which can be financed) as well as a monthly amount. With an FHA loan, mortgage insurance is for the life of the loan. To remove the mortgage insurance you EITHER 1) refinance into a conventional loan later on OR 2) when you take out the loan you make a down-payment greater than 10%.
USDA loans offer 100% financing. They are only offered in rural areas where financing a purchase is difficult due to a lack of lenders covering that area. There are restrictions on the size of the home and its features. Currently, these are up to 2,000 sf of living area and no in-ground pool. A 640 credit score is required and there are household income limits (currently $99,245 in San Diego county) that change annually.
VA loans incorporate the best of all worlds. They finance 100% of the purchase (up to $484,350) and do not require mortgage insurance. They are limited to past and present members of the military and their spouses. Fiancees, ex-spouses, children, parents and relatives are not eligible. For 2020, there will be no limit on amount financed at 100% (as of this writing).
As a mortgage broker as well as a realtor, I look for the best mortgage loans given the current interest rate, the fees involved and your credit history. When you do not fit a particular lender’s criteria, I search for a lender who will work with you to make the loan possible. Contact me directly at 760 622 5087 or [email protected] to discuss your needs and how I can help you.