Understanding Mortgage Programs For First Time Homebuyers
Importance Of Understanding Mortgage Programs And Guidelines
Understanding mortgage programs and lending guidelines are important for borrowers. Not all lenders have the same lending guidelines on government and/or conventional loans. All lenders need to have borrowers meet the minimum agency mortgage guidelines. However, each lender is allowed to set higher lending standards called lender overlays.
Most lenders have overlays on FHA, VA, USDA, and Conventional loans. Gustan Cho Associates Mortgage Group is one of the very few lenders that do not have any lender overlays on FHA, VA, USDA, and Conventional loans. Understanding mortgage programs can be overwhelming for first-time homebuyers. However, it is not too difficult nor does it need to have to be confusing.
In this article, we will explain the basics of the most popular mortgage programs for first-time homebuyers.
Understanding FHA Loans
FHA Loans are the most popular mortgage program for first-time homebuyers and mortgage borrowers with less than perfect credit. HUD is the parent of the Federal Housing Administration. FHA is not a lender. FHA is a government agency. Its role is to insure FHA loans that are originated and funded by private lenders. It is the largest mortgage insurer in the United States with an overall portfolio of more than $1.3 trillion.
To qualify for a 3.5% down payment FHA loan, the borrower needs a 580 credit score. Borrowers with under 580 FICO down to 500 can qualify for FHA loans. However, for any borrower with under 580 credit scores, a 10% down payment is required. FHA has very flexible lending guidelines. The borrower can qualify for FHA loans after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale as long as they can meet the waiting period guidelines.
Understanding Mortgage Programs And Guidelines On FHA Loans
Here are the basic HUD Guidelines on FHA Loans:
- The borrower needs a minimum down payment amount of 3.5%
- The down payment and closing costs can be gifted
- Since FHA loans are guaranteed and insured by the government, mortgage rates are lower than conventional loans
- Mortgage rates depend on the borrower’s credit scores
- Mortgage insurance costs: Up-front premium of 1.75% paid at closing; monthly premium of 0.45% to 1.05% of the total loan amount
- Other costs: Closing costs (FHA borrowers paid an average of $9,402 in 2020)
- Minimum credit score requirement: 580 to qualify for the lowest down payment
- 500 credit score required for 10% down payment
- The maximum loan amount: $356,362 in low-cost areas, $822,375 in high-cost areas
- FHA loans are for primary owner-occupant properties only
FHA loans are very popular among first-time homebuyers and buyers with less than perfect credit. Gustan Cho Associates has no lender overlays on FHA mortgages.
Understanding Mortgage Programs On Conventional Loans
Conventional loans are not backed by any government agencies. Conventional mortgages are originated and funded by private mortgage companies. Lending standards are higher on conventional loans than FHA mortgages.
Here are the basic minimum mortgage guidelines on conventional loans:
- The minimum down payment amount is 3% to 5%
- Private mortgage insurance is required on conventional loans with a loan to value higher than 80%
- The private mortgage insurance costs: 0.5% to 1% of the loan if you make a down payment under 20%
- Average closing costs are between 2% and 5% of the loan amount
- Minimum credit score requirement: 620 on average
- The maximum loan amount on Conventional loans have limits of $548,250 in most counties and $822,375 in high-cost areas
- Conventional loans allow primary home financing, second homes, and investment property financing
- Unlike FHA loans, there is no upfront mortgage insurance
- Private mortgage insurance can be canceled once the borrower reaches a 78% loan-to-value ratio on conventional loans
Conventional loans benefit borrowers with higher credit scores and lower debt-to-income ratios.
VA Mortgage Guidelines
The United States Department of Veterans Affairs guarantees and insures VA loans. VA loans are the best loan program for owner-occupant home buyers. However, not everyone can qualify for VA. Only select members of the United States Military with a Certificate of Eligibility (COE) are eligible. VA mortgages are for active and/or retired members of the Armed Services. Mortgage rates on VA loans are lower than conforming loans.
There is no down payment required. Lenders offer 100% financing. The VA Funding Fee can be rolled into the loan balance so there is no money out of pocket. The average funding fee is 2.3% of the loan. There is no annual mortgage insurance required. There is no minimum credit score requirement. There is no maximum debt to income ratio caps. There is no maximum loan limit on VA loans. Gustan Cho Associates has no lender overlays on VA loans.
USDA Mortgage Guidelines
USDA loans are a government-insured mortgage loan program that offers 100% financing with no down payment. USDA mortgages benefit homebuyers with low to moderate incomes who are planning in buying a home in a USDA designated area.
Here are the basic USDA mortgage guidelines:
- There is no down payment requirement
- USDA guarantee fee which is typically 1% of the loan amount
- An annual mortgage insurance premium of 0.35% of the loan balance
- USDA does not set a minimum credit score, but most lenders require a score of 620 to 640 or higher
- DTI requirement: 41% (unless you have compensating factors like cash reserves)
- No maximum loan amount
- USDA loans have income caps
- Household income can’t exceed $86,850 for a 1-to-4 person household, except in some high-cost regions
USDA loans benefit homebuyers with low to moderate-income buying a home in a rural and/or suburban area. The property needs to be located in a designated USDA-approved area.
Non-QM loans are portfolio loans. There is no waiting period after bankruptcy and/or foreclosure. There is no private mortgage insurance required and no maximum loan limit. One of the most popular non-QM loan programs is the bank statement loans for self-employed borrowers with no income tax required. We also offer asset-depletion mortgage programs. There are many types of non-QM mortgages. For more information, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.