Finance Your Home
Comparing Conventional, FHA, VA, Wheda, USDA, and Jumbo Loans
There are several different types of loans to choose from. Which is best for your particular situation?
Conventional loans are the old standard, requiring borrowers have higher down payments, better credit and lower income to debt ratios to qualify when compared to FHA loans. In the past, you might have had trouble securing a conventional loan with less than 20 percent down, but today it only takes about 5 percent, which puts them in reach of many borrowers with good credit. Unlike FHA loans, conventional loans aren’t insured, but purchased directly by Fannie Mae or Freddie Mac. Since banks don’t have to worry about keeping these loans on the books for any amount of time, they’re much more eager to make them.
There’s no upfront mortgage insurance, unlike an FHA product, but unless you have a 20 percent down payment, you will pay a monthly premium based on your loan amount and credit score. However, you may be able to cancel your mortgage insurance after two years if your home’s value has increased enough to give you 20 percent equity.
Federal Housing Administration (FHA) Loans
The FHA was established in 1934 to aid the ailing housing sector. By the 1940s, FHA primarily was helping returning soldiers finance homes. But by the 1980s, it was helping insure private mortgages across the country.
If you’re just getting started in the housing market and you don’t have much money in hand and a little more debt than you’d like, an FHA loan may be the right choice. These loans are the most forgiving of credit problems, allow a borrower to finance up to 96.5 percent of the cost of their home and can be manually underwritten to stretch debt to income ratios in specific circumstances for those borrowers who qualify for exceptions. You’ll find FHA loans through your local banks – brokers often shy away from them because they limit the fees lenders can collect.
Unlike a conventional loan, FHA loans require the payment of both an upfront and annual loan insurance premium, divided monthly. The upfront portion can be financed into the loan, reducing the money required at closing, but you’ll be paying interest on that money for the life of the loan. Along with that large upfront premium, you’ll be required to make a monthly loan insurance payment, further increasing your overall costs over the life of the loan, unlike with a conventional mortgage.
Department of Veterans Affairs (VA) Home Loans
VA loans are another option for borrowers with little free cash but decent credit, provided they’ve served in the military. You’ll need to obtain a Certificate of Eligibility through your lender or the VA Loan Eligibility Center before you will be able to close your loan, however. Qualifying for a VA loan is a lot different than any other loan on the market – the Department of Veterans Affairs places no strict limits on the credit eligibility or debt to income ratios of the borrowers they insure. Instead, most underwriting items are left to the discretion of the bank involved. Most banks will lend with standards similar to FHA, but they’re under no obligation to do so.
The Department of Veterans Affairs may not provide a lot of guidelines on who to loan VA funds to, but they’re very strict on what fees can be paid by borrowers and how much they can pay for things like closing costs.
Even though VA loans are an excellent option for many veterans, there are a few drawbacks. If you have plenty of cash and excellent credit, you may be able to find a better rate with a conventional loan, plus you’ll avoid the VA funding fee.
Wisconsin Housing and Economic Development Authority (WHEDA)
For more than 40 years, WHEDA has been helping first time homeowners in Wisconsin. In fact, more than 118,000 Wisconsinites have purchased their home with a WHEDA loan.
- WHEDA Advantage Home Loan
The WHEDA Advantage provides home buyers with a versatile loan that features low monthly mortgage payments, down payment and closing cost assistance, a 30-year fixed-interest rate, and more. Although WHEDA requires borrowers to attend a Home Buyers Education course prior to closing, the generous loan and income limits make it a good choice for many first time buyers.
United States Department of Agriculture (USDA) Loans
Not everybody lives in an area that will qualify for a USDA home loan, but for those that do they can be a much better deal than any other mortgage product. Rates are set by lenders, but they are typically fairly low and no down payment is required. The main program used to lend to home buyers is the Guaranteed Housing Loan Program, which allows buyers to roll eligible closing costs, lender fees and any allowable repairs into the loan, up to the value of the home.
Although it’s fairly easy for a borrower to qualify for this type of loan, there are several catches. First, the borrower must not have income exceeding 115 percent of the median income for their area. Secondly, the home must be located in an area targeted for rural development. Third, the home itself has to meet the USDA’s exacting standards, which can be difficult to meet if the home wasn’t built with USDA financing in mind.
It may seem too simplistic, but a jumbo loan is just that – a loan amount that’s much bigger than the norm. Any loan that exceeds Fannie Mae or Freddie Mac’s cap for the area where the property is located is technically a jumbo, though there’s no real limit on how big a jumbo can get.
A credit score of 700 or better, high down payments of 20 to 30 percent and solid proof of income are just a few of the things that jumbo lenders look for before handing over this kind of money. Since there is no insurance on a jumbo mortgage, lenders can be particularly cautious when considering potential applicants.
Note: The information provided is a general overview of the different types of financing available.
Consult your local mortgage professional for specific terms and conditions.
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