Choosing the right mortgage for you is almost as hard as choosing the right house. A mortgage is something you could have for the next 30 years – it’s not a decision to take lightly.
So how do you know which one is right for you? We help you understand the various mortgage programs below.
Government Backed Loans
You’ve probably heard of the various government-backed loans before, but you should know how they all work.
FHA loans are the most common so we’ll start with those. With the FHA loan you need just 3.5% down on the home. You also need a 580 credit score, 31% housing ratio, 41% total debt ratio, and stable income/employment.
VA loans are only for veterans of the military, Reserves or National Guard. They are also for the surviving spouse of any veteran that lost life while on active duty or as a result of their injuries/illnesses while on duty. Veterans and/or their spouses can get 100% financing, which means no down payment. In order to qualify for the VA loan, you need a 620 credit score, 42% total debt ratio, and stable income/employment.
USDA loans are for borrowers that live in rural areas. They are also for low/moderate income families. The USDA uses the total household income to determine your eligibility for the program. If your household income exceeds 115% of the average income for the area, you won’t be eligible for the program. If you are, though, you’ll need a 640 credit score, 29% housing ratio, 41% total debt ratio, and stable income/employment
Conventional loans are reserved for borrowers with good credit. Typically, you need at least a 680 credit score and a 5% down payment. You also need a maximum 28% housing ratio and 36% total debt ratio. Like most other loans, you need to prove that you also have stable income/employment. Conventional loans are the hardest to secure.
Deciding Which Loan is Right for You
So how do you know which loan is right for you? We give you some questions to ask yourself to help you decide.
- What is your credit like? If you have only mediocre credit, you’ll want to lean towards the government loan programs. If you have great credit, though, the conventional loan may be something you want to explore.
- How much do you have to put down on the home? If you don’t have any money to put down on the home, you’ll need a government loan. If you have a little, but not quite 5%, you may need an FHA loan. If you have more than 5%, though, the conventional loan may be a good option.
- What is your debt ratio like? Does your debt ratio, which is a comparison of your expenses to your gross monthly income come close to the maximum for the conventional loan or does it exceed it a lot? If it exceeds it, you may need the more flexible guidelines of the government loans.
It may seem cut and dry regarding which loan would work best for you, but there is a little overlapping here. For example, if you have great credit and a low debt ratio, but you don’t have 5% to put down on a home, you’d probably choose the FHA loan. But you may be able to obtain gift funds for a part of the down payment and put some of your money into the transaction too. If this is the case, you may qualify for a conventional loan.
The key is to talk to several lenders and get quotes from them. This way you can see which loan programs you qualify for and how they will affect your investment. One loan program isn’t better than the other – it’s all about what you think is the best for your situation.