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Types of Home Loans and Special Considerations: Benefits You May Be Qualified For

Posted by Andy Brikho on June 12, 2018
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Mortgages can be challenging to get approved for if your financial profile is not as pristine as it could be, but there are different types of home loans and mortgage assistance programs that can help. Conventional lenders typically prefer to deal with borrowers who have stellar credit, have a sizable amount of money to use for a down payment and earn a good income. Those who don't meet the stringent criteria of conventional lenders, like having less-than-perfect credit, may have a harder time getting approved for the mortgage loan they need to buy a home.

Having said that, there are certain programs designed for specific demographics to make obtaining a mortgage easier and more affordable. Do you qualify?

Federal Housing Administration (FHA) Loans

Conventional loans typically require a minimum down payment amount of five percent of the purchase price of a home, as well as a credit score of at least 620. Homebuyers who aren't able to come up with at least five percent of the cost of the home purchase or who don't have a high credit score may be eligible for an FHA loan. 

Unlike conventional mortgages, these home loans are insured by the Federal Housing Administration (FHA), which makes qualifying for a mortgage much easier, especially for first-timers. In fact, first-time home buyers make up a large component of borrowers who apply for FHA loans because of the attractive options and less stringent lending requirements.  

FHA loans allow down payments as low as 3.5 percent of the purchase price of the home for those with a credit score of at least 580. That said, credit scores can be as low as 500, though a 10 percent down payment will need to be made in this case. Basically, the lower the credit score, the higher the down payment required. 

It should be noted that you will have to pay mortgage insurance over the life of the loan if you apply for this type of mortgage, which protects the lender if you default on your monthly payments. 

Who they're good for:

  • First-time home buyers
  • Buyers with a low down payment
  • Buyers with a low credit score or less-than-perfect credit

Fannie Mae’s HomeReady Program

Fannie Mae’s HomeReady program offers buyers a low down payment option, with only three percent of the home’s purchase price required to qualify. The money can also come from a loan, grant or gift that's acceptable according to the lender. 

All members of the household are allowed to pool their money together in order to come up with the down payment, which means anyone living in the home — including parents, grandparents and working adult children — can contribute to the down payment. Borrowers can also enjoy discounted mortgage insurance. 

In order to qualify for the HomeReady program, you cannot own another home in the US, and you must complete an online homeowner's counseling course. In addition, your credit score must be at least 620.

Who they're good for:

  • Low- to moderate-income buyers
  • Buyers with a low down payment amount

Freddie Mac's Home Possible Loans

Similar to Fannie Mae's HomeReady program, Freddie Mac's Home Possible loan program is another great option for low-income borrowers who are unable to come up with a five percent down payment that is required for conventional loans. 

Only need three percent of the home’s purchase price is required, which can come from a number of sources similar to Fannie Mae's program. Mortgage insurance, which is required for these types of government-backed programs, can be canceled after the loan balance dips under 80 percent of the appraised value of the property, which can save you thousands of dollars over the life of the loan. 

If your credit is an issue, you may be able to qualify without a credit score if you're able to come up with a down payment of at least five percent of the purchase price.

Who they're good for: 

  • Low- to moderate-income buyers
  • Buyers with a low down payment amount
  • Buyers purchasing in underserved communities

The Difference Between Conforming and Non-Conforming Loans

Both Fannie Mae’s HomeReady Program and Freddie Mac's Home Possible Loans are known as a conforming loans. A conforming loan means it conforms to Government-Sponsored Enterprise (GSE) guidelines. The most well known guideline refers to loan limits. Non-conforming loans, like jumbo loans, do not meet these guidelines.

VA Loans

If you are an active or retired member of the military, or are a spouse of a veteran, you may be eligible for a VA loan, which comes with a plethora of perks.

For starters, there is no down payment required, so you can realistically buy a home without having to put a penny towards a down payment. If you're struggling to come up with a down payment, a VA loan is a great option for you if you meet the criteria. 

There is also no minimum credit score required under this program. That said, some lenders may require their own minimum amounts if they so choose. Further, no mortgage insurance is required, which can be a huge money-saver over the life of the loan. 

Who they're good for:

  • Buyers who are in the military (whether active or retired), as well as spouses of veterans
  • Buyers with low credit scores
  • Buyers with limited funds for a down payment

USDA Mortgages

If you are planning to buy a home in a rural part of town, you may be eligible for a USDA loan, which helps low- to moderate-income homebuyers purchase properties in rural areas.

The biggest perk of a USDA loan is its 100 percent financing, which means no down payment is required to qualify. Buyers who are unable to gather up enough funds for a substantial down payment would find this type of loan program very helpful if the home being purchased is located in what the government considered to be a rural area. 

Who they're good for:

  • Low- to moderate-income buyers
  • Buyers purchasing in rural areas

Final Thoughts For First-Time Home Buyers

Not everyone meets the stringent lending criteria that conventional lenders typically require. While these lending requirements are put in place to ensure that borrowers are able to make their monthly mortgage payments on time and in full to avoid foreclosures, they also make it tough for some homebuyer-hopefuls to realize their dreams of homeownership. 

Luckily, there are plenty types of mortgages out there that can make the mortgage process much easier. To find out if you qualify for any one of the above-mentioned mortgage programs, be sure to speak with a seasoned mortgage specialist today.


Topics: Mortgage Types, Types of Home Loans