What Is The Best Mortgage Loan For Buying A House?

In this blog, we will discuss and cover what is the best mortgage loan for buying a house. Many home buyers often do not know where to start when applying for a mortgage for a home purchase. Homebuyers will tend to rely on their realtor, family members, attorneys, or business associates for advice. However, most answers they get can often be conflicting and not the best answer for their best interests. Once renters are ready to purchase their dream home, they need to get pre-approved so they can shop for a home.

How Much Money Do I Need To Buy My First Home?

This is once again a very loaded question as every loan will have slightly different down payment requirements as well as closing costs. Depending on your credit score, closing costs can and will vary. Depending on the area of the country you are purchasing your home in, closing costs can vary dramatically. Each state has different recording charges and localized closing costs. A general rule of thumb is to utilize 3%-4% of the purchase price for mortgage closing costs. For a more specific quote in your area, please reach out to our team and a licensed loan officer will discuss your closing costs in detail. Homebuyers that decided on what type of house to shop for and nailed down the neighborhood, the next step is to select what is the best mortgage loan for buying a house. Selecting the best mortgage loan for buying a house can often be overwhelming and confusing. In this guide to what is the best mortgage loan for buying a house, we will go over the key bullet points on the best mortgage options for homebuyers.

What Is The Best Mortgage Loan For Buying a House For First-Time Home Buyers?

FHA Loans have lower credit score requirements than conventional loans. Many first-time homebuyers may not have strong established credit or some may not even have a credit score. Many recent college graduates do not have credit scores. FHA loans with no credit score requirements are the home loan of choice for recent college graduates. FHA loans have lenient guidelines when it comes to bad credit borrowers. You do not have to pay outstanding collections and/or charged-off accounts to qualify for an FHA loan. First-time homebuyers with at least a 580 credit score can qualify for a 3.5% down payment home purchase FHA loan. First-time homebuyers with at least a 620 credit score can qualify for a conventional loan with a 3% down payment. Conventional loans require higher credit scores.

There are many different types of mortgage loans and each one offers a unique set of advantages and disadvantages. the difference between conventional versus FHA loans. FHA loans are the most popular mortgage loan program in the U.S. HUD, the parent of FHA is the government agency that sets FHA Guidelines. FHA is not a mortgage lender. FHA guarantees private lenders that originate and fund FHA Loans in the event the borrower defaults and the property goes into foreclosure. FHA will insure the defaulted FHA loans. There is no government guarantee with Conventional Loans. Conventional Loans are also called conforming loans. This is because they need to conform to Fannie Mae and Freddie Mac’s Mortgage Guidelines.

How Can Borrowers Qualify For Conventional But Not FHA Loans

Many borrowers ask the question of the Difference Between Conventional Versus FHA loans. There is much Difference Between Conventional Versus FHA loans. There are times when home buyers may qualify for conventional loans but not FHA loans and vice versa. An example of a case scenario where home buyers qualify for conventional loans but not FHA loans is the case where homeowners had a mortgage part of Chapter 7 Bankruptcy. Waiting period Difference Between Conventional Versus FHA Loans on cases when the mortgage was part of Chapter 7 Bankruptcy.

Having Prior Mortgage Included in Chapter 7 Bankruptcy

Conventional Home Loans are generally for better credit and income profile borrowers. However, there are cases where borrowers will not qualify for FHA loans but will qualify for Conventional loans. When a prior homeowner had a mortgage part of Chapter 7 Bankruptcy, the Difference Between Conventional Versus FHA Loans is the waiting period. On Conventional Guidelines On Mortgage Part Of Bankruptcy, there is a four-year waiting period from the discharged date of Chapter 7 if there was a mortgage part of Chapter 7. Cannot reaffirm the mortgage. The housing event needs to have been finalized. There is no waiting period on housing events, whether it was a foreclosure, deed in lieu, or short sale, but needs to have been completed. With FHA Loans, the waiting period is three years from the date of the finalized housing event (foreclosure, deed in lieu, short sale). Even though the mortgage was included in Chapter 7, the waiting period start date is the recorded date of the foreclosure, deed in lieu, or the short sale date.

Best Mortgage Loan For Buying a Home For Homebuyers With Great Credit

The best mortgage loan for buying a home with high credit scores, great credit, and great income with a low debt-to-income ratio are conventional home loans. We will discuss the ideal first-time homebuyer for a conventional loan. Here is an ideal first-time homebuyer for conventional loans:

• Say Borrower Smith has credit scores of over 740 and no history of bad credit
• Also had no prior bankruptcies, foreclosures, deed in lieu of foreclosures, or short sale.
• Have been perfect with paying bills and have never had a late payment in my life
• Have over 5 credit tradelines that are seasoned for over 24 months and a stable job for the past three years
• Is a first-time home buyer and wants to purchase a home via the conventional loan route
• Has 3% down payment to qualify for the first-time home buyer conventional loan program
• The debt to income-ratio is 45%

The above client is a perfect conventional borrower.

Best Mortgage Loan For Buying a Home With Low Closing Costs

FHA loans cost more in closing costs than other loan programs due to the FHA MIP. One of the biggest disadvantages of going with an FHA-insured mortgage loan is due to the mortgage insurance premium. FHA borrowers need to pay an upfront 1.75% mortgage insurance premium. Plus they get charged a 0.85% mortgage insurance premium on the balance of their mortgage loan for the life of a 30-year fixed-rate FHA loan. The only way to eliminate the mortgage insurance premium is to pay off the loan either by refinancing it to a conventional mortgage loan program. Or paying off the FHA-insured mortgage loan by selling the home. FHA-insured mortgage rates are lower than conventional loan mortgage rates. But due to the hefty mortgage insurance premium, the monthly housing expenses are normally higher. Good credit borrowers prefer going with conventional loan programs than FHA loans

What Is The Most Popular Mortgage?

The above case scenario is a case where the mortgage loan borrower seems like a solid borrower and seems like they can qualify for a conventional mortgage. However, there are cases where a borrower who qualifies for a conventional mortgage needs to move to the FHA loan program due to many reasons. We gave an example above when some borrowers qualify for conventional loans and not FHA Loans. However, there are cases where the conventional mortgage loan borrower needs to convert their conventional loan to the FHA loan program. Below are some examples where a borrower needs to convert the conventional loan to the FHA loan program.

What Are The Best Mortgage Loan For Buying a Home With High DTI?

High debt-to-income ratios ofter are deal killers for homebuyers with not enough qualified income.  A Borrower can have the best credit in the world but with high debt-to-income ratios, they will not qualify for a conventional mortgage loan. Conventional mortgage loan programs normally require 50% debt to income ratios. Exceeding those debts to income ratio caps will need to go from conventional loan to FHA loan. FHA debt to ratios can max out at 46.9/56.9% to get AUS Approval. 46.9% front end and 56.9% back end debt to income ratios.

Best Mortgage Loan For Buying a House With High Deferred Student Loans

There are strict guidelines for qualifying for mortgage loans with high-student loans and deferred student loans. The Federal Housing Administration no longer allows deferred student loans that have been deferred for 12 or more months not to be counted towards debt to income calculations. 0.50% of the student loan balance is used as monthly debt. If the borrower can contact a student loan provider and get a fully amortized monthly payment over the extended term (25 years) that figure will be used. That figure turns out to be 0.50% of the student loan balance.

Can I Qualify For Home Loans With Student Loans on IBR Payments?

HUD now allows for Income-Based Repayment on student loans to be used on FHA loans. Conventional loans also allow Income-Based Repayment on student loans. With FHA and conventional loans future monthly student loan payments are calculated as part of the debt-to-income calculations. If future monthly student loan payments from the student loan provider cannot be provided, the lender will calculate 0.50% of the total student balance amount as a monthly student loan payment.

Can I Have a Co-Signer To Buy a Home?

FHA and conventional loans allow non-occupant co-borrowers to be added to the loan. Non-occupant co-borrower can be added to FHA and Conventional Loans due to high debt-to-income ratios. FHA allows non-occupant co-borrowers from family members, relatives, or persons related by law. If non-occupant co-borrowers are not related, then a 25% down payment is required. Fannie Mae and Freddie Mac do allow non-occupant co-borrowers. Non-occupant co-borrowers do not have to be related as FHA requires. Fannie Mae and Freddie Mac allow non-occupant co-borrowers who are NOT family members to be added to borrowers.

What Are The Best Mortgage Loan For Low Down Payments

Down payment requirements on home purchases

• FHA allows 100% gifted funds for the down payment
• Conventional mortgage loan programs require that part of the down payment needs to come from the borrower
• The portion of it can be gifted
• For example, the minimum down payment for a conventional loan is 5%
• The mortgage lender will require 3% of the 5% required to come from the borrower and the other 2% to be gifted
• FHA allows 100% of the down payment to be gifted

Best Mortgage Loan For Buying a Multi-Family Property With Little Money Down

Multi-unit properties: 

• For buyers purchasing a 2-unit to a 4-unit residential multi-family unit, conventional mortgage loans require a 15% down payment
• However, FHA only allows a 3.5% down payment on 2 to 4-unit multi-family residential properties
• This holds true as long as one of the units is the owner-occupant unit

Home Buyers needing to qualify for a mortgage with a direct lender with no overlays on government and conventional loans, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week to answer any questions or mortgage scenarios.