What Are My Options for Lenders?

Would-be borrowers search for financing for a variety of reasons. Because of these unique needs, there are many lending options in the mortgage market. Below is an overview of some of the typical home loans available:

• Conventional Mortgages. Conventional mortgages are provided by private, non-government lenders such as credit unions, banks, and mortgage companies. These mortgages are not insured or guaranteed by any government entities such as the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), or the U.S. Department of Veterans Affairs (VA). Conventional loans' interest rates are typically higher than the interest rates of government-backed mortgages. However, government-backed mortgages tend to require borrowers buy mortgage insurance, an additional expense that may result in costs being the same as conventional mortgages despite their lower interest rates. Borrowers with good credit scores and solid finances usually will have no trouble qualifying for conventional mortgages. Specifically, to ensure an applicant has little trouble obtaining a mortgage from a conventional lender, the applicant should have the following:

  • A credit score higher than 680. If the borrower's credit score is significantly higher, that borrower will qualify for a lower interest rate.

  • A sufficiently low debt-to-income ratio (DTI), at most around 43%, reflecting the percentage of monthly income that is spent on monthly debt payments.

  • Sufficient funding to afford at least a 20% down payment on the home. With less than 20% down payment, borrowers may be required to purchase private mortgage insurance.

• FHA Loan. An FHA loan is a mortgage insured by the FHA and issued only by federally qualified lenders. This type of loan offers government protection for lenders, allowing FHA loans to offer more advantageous terms for borrowers. These terms include generous interest rates and lower down payment and credit score requirements. Note that under an FHA Loan, borrowers are required to pay both the upfront and annual mortgage insurance premiums.

• VA Home Loans. VA loans are provided through a program established by the US Department of Veterans Affairs (VA). The VA aims to provide loans to qualifying veterans. Generally, VA loans do not require any down payment or mortgage insurance and have low interest rates. If you or your spouse is a military service member, you may be qualified to apply for a VA Home Loan.

• USDA Rural Housing Loan. USDA loans, provided by the US Department of Agriculture, do not require a down payment. These loans are designed to help borrowers in rural areas to finance their properties. Qualified applicants must live in a rural area and earn low- to middle-income.

• Jumbo Loans. Jumbo loans refer to mortgages whose amounts exceed the loan size limits set by the Federal Housing Finance Agency (FHFA). This limit currently is set at $484,350 in most states. These mortgages are also called non-conforming mortgages and cannot be purchased or guaranteed by Fannie Mae and Freddie Mac. Like conventional loans, jumbo loans also are not insured or guaranteed by government agencies.

Different lenders offer widely different terms and requirements for non-conforming mortgages, though generally, jumbo loans typically have higher down payments, interest rates, and credit score requirements than conforming loans.