A USDA or an FHA loan could potentially save you money on upfront home buying costs by reducing or eliminating your down payment obligations when applying for a mortgage.
These government-assisted loan programs offer several benefits to prospective homebuyers, including a reduction to the eligibility requirements that must be met in order to obtain a mortgage.
A conventional loan can offer several benefits, including a lack of Mortgage Insurance Premiums in some cases, saving a borrower a great deal of money over the life of the loan. However, traditional loans can include higher down payment amounts and may require a potential borrower to meet higher credit score minimums, have a lower debt-to-income ratio or have a higher income.
Learn About the Requirements for Different Loan Types
Like a conventional loan, applicants must still meet qualifications in order to obtain mortgage approval, including credit score, debt-to-income ratio and income requirements. However, a mortgage lender’s requirements, including credit score minimums, are reduced when applying for this type of loan. However, most USDA and FHA loans will require borrowers to pay Mortgage Insurance Premiums (MIPs) throughout the life of the loan. This can lead to higher costs throughout the life of the loan.
You may qualify for a VA loan if you are an active duty military personnel, a veteran or a qualifying surviving spouse. Similarly to FHA, the VA insures a portion of the mortgage that is offered by a private lender in order to reduce eligibility requirements and add additional benefits. These types of mortgages should be strongly considered if you qualify.
About FHA Loans
An FHA loan offers prospective homebuyers an opportunity to qualify for a mortgage and purchase a home with fewer eligibility requirements and a reduced down payment obligation in comparison to that of traditional mortgages. The Federal Housing Administration (FHA) insures a mortgage in order to reduce the risk that a lender takes in issuing a mortgage to a homebuyer and, thus, enticing the lender to reduce the eligibility requirements that an applicant would otherwise need to meet in order to qualify for a loan. In the event of a foreclosure, the FHA makes the lender whole and takes possession of the property rather than the bank.
FHA loan requirements make it easier for new buyers to qualify for a mortgage, especially if the buyer has a lower credit score or income. Applicants may qualify for an FHA mortgage if:
- They have a FICO credit score of at least 500.
- They agree to enroll in Mortgage Insurance Premiums (MIPs).
- They have a debt-to-income ratio of up to 43 percent.
- They have a steady income and can provide proof of employment.
- The home they intend to purchase will become your primary residence.
If applying for an FHA home loan with a credit score of at least 580, then your down payment requirement could be as low as 3.5 percent of the home’s purchase price. If your score is at least 500 but less than 580, then your down payment obligation will be 10 percent. If interested in obtaining this type of loan, then you will need to contact an approved lender to get started and complete an application.
About Conventional Loans
A conventional loan is a type of mortgage that is offered by private lenders and financial institutions without any ties to a government agency. Like other types of loan, this traditional loan offers several benefits and drawbacks.
Conventional loan rates can vary widely between lenders as well as based upon your credit score, credit history, debt-to-income ratio and income level. However, most lenders do not require that a borrower also pay Mortgage Insurance Premiums, so long as the borrower is able to provide at least a 20 percent down payment on the purchased home.
While borrowers can potentially save money on a conventional mortgage due to the lack of MIPs, it can be far more difficult to qualify for this type of loan. Eligibility requirements for these types of loans can vary between lenders, but typically require a borrower to have:
- A minimum credit score between 620 and 700.
- Reliable income and a steady employment history for a minimum period of two years.
- A lower debt-to-income ratio compared to government-backed mortgages.
While a higher down payment can be hard to provide, borrowers that are able to submit a large down payment up front generally build home equity faster. Furthermore, interest rates for this type of loan are generally determined by your credit score. Therefore, if you have a high credit score and sizeable down payment, then you will likely save more money obtaining a traditional loan compared to a government-backed loan.
About USDA Loans
United States Department of Agriculture (USDA) loans are backed by the government in order to reduce mortgage eligibility requirements and make a home more obtainable, which is similar to the loan program offered by the FHA. Also, like an FHA mortgage, a USDA home loan will require the borrower to pay a monthly insurance premium. While this premium amount is reduced as your loan balance decreases, it can increase the overall amount a borrower can expect to pay throughout the life of the loan.
However, you must meet the eligibility requirements to obtain this type of loan. You may qualify for a loan that is backed by the USDA if:
- You purchase a property in an area that is considered to be a rural area based upon USDA definitions (an estimated 97 percent of the country is geographically eligible).
- You must meet income limits, which are set at 115 percent of the median income for the county or metropolitan area.
- The home you intend to purchase will become your primary residence.
- You must meet credit and debt-to-income ratio limits, which may vary by lender but are overall lower than that of a traditional mortgage.
Another benefit of a USDA mortgage is that, in most cases, applicants are not required to pay a down payment when purchasing a cost. While other fees, such as closing costs, may still apply, the elimination of down payment requirements can greatly increase the ease of purchasing a home.
About VA Loans
A VA loan is only available to qualifying active duty military personnel, veterans and their surviving spouses. However, if qualified, then this type of loan offers numerous benefits, including but not limited to:
- No down payment obligations as long as the sale price of the home does not exceed the appraised value of the home.
- No Mortgage Insurance Premium requirement.
- Closing costs are often significantly reduced or eliminated.
- No penalty fee for repaying your loan before the end of your loan term.
A veterans home loan is another type of government-insured mortgage that has strict service-related eligibility requirements. Additionally, applicants must meet debt-to-income ratio, income and credit score eligibility requirements. However, these requirements are often far lower than traditional loans.
Eligibility can be determined and applied for by mail, at any VA office or through an approved lender. However, this type of loan can only be applied for through a lender that has been approved for the program.
A number of loans for veterans are available, including loans for initial purchases or refinance options, which can save qualifying borrowers money over the life of a refinanced loan. In order to obtain one of these loans, the applicant must be able to provide documentation to prove eligibility, such as a copy of discharge or separation papers (DD214) or a statement of service that has been signed by a commanding or personnel officer.