Home Loans - Michael Phillip - Colorado Real Estate

Home Loan Types

When thinking of purchasing a home, determining how you will be financing that purchase should be your first step in your home buying process. This is typically done through a home loan or by paying in cash. Depending on your individual needs and situation, there are many home loan options to choose from.

Below are the most common types of home loans, their basic requirements, and limitations. However, rates and terms can change rapidly, so use this guide only as a reference. To determine which loan type is best for your situation and for more details on qualification criteria, consult with your lender. If you do not have a lender, reach out to me, and I will be more than happy to pass along the information of some really great lenders that I have worked with!

Conventional Mortgage Loan

A conventional home mortgage loan is not insured by the federal government
There are two types
1. Conforming
  - The loan amount falls within maximum limits set by the Federal Housing Finance Agency.
2. Non-conforming
  - Those that do not meet the guidelines of the Federal Housing Finance Agency. (ie, Jumbo loans)
If you put < 20% down of the homes purchase price, you will owe private mortgage insurance (PMI).
This type of loan can be used for a primary home, second home, or investment property
Overall borrowing costs with a conventional loan tend to be lower than other types of mortgages, even if interest rates are slightly higher
You can ask your lender to cancel PMI once you’ve reached 20 percent equity
You can pay as little as 3% down on loans backed by Fannie Mae or Freddie Mac
Minimum FICO score of 620 or higher is often required
You must have a debt-to-income ratio of 45 percent to 50 percent
Significant documentation required to verify income, assets, down payment and employment
Current (Dec 2021) conventional loan limit for single-family homes in Denver and Douglas counties are $684,250, and in El Paso County is $647,200

Conventional home loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.

Jumbo Loans

A jumbo home loan are utilized when loan amounts exceed the max loan limits for a specific county
Interest rates tend to be competitive with other conventional loans
10-20% down payment is required.
Typically, lenders require a FICO score of 700 or higher, although some will accept a minimum score of 660.
You cannot have a debt-to-income ratio above 45 percent
You must show you have significant assets (generally 10 percent of the loan amount) in cash or savings accounts
Jumbo loan is determined solely by how much financing you need, not by the purchase price of the property.

Government Backed Home Loans

FHA loans – Backed by the FHA, these types of home loans help make homeownership possible for borrowers who don’t have a large down payment saved up or don’t have pristine credit. Borrowers need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment; however, a score of 500 is accepted if you put at least 10 percent down. If you put less than 10 percent down, FHA loans require you to pay two mortgage insurance premiums: one upfront and the other annually for the life of the loan. This can increase the overall cost of your mortgage.

To read more about FHA loans, check out this post: Is a FHA Mortgage Loan Right for You?

USDA loans – USDA home loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Many USDA loans do not require a downpayment for eligible borrowers with low incomes.

VA loans – VA home loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. Lenders do not require a down payment or PMI (private mortgage insurance) for VA loans. They charge a funding fee as a percentage of the loan amount on VA loans to help offset the program’s cost to taxpayers. This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing by either the buyer or the seller. However, you can get the VA funding fee waived altogether if you have a VA Disability.

If you are considering using a VA loan, your first step would be to check your Entitlement status, and receive your COE, or Certificate of Entitlement. You If you currently have full entitlement, there are no loan limits and you may borrow as much as you can qualify for.

You have full VA entitlement if you’ve:
- Never used your home loan benefit, or
- Paid a previous VA loan in full and sold the property (in this case, you’d have your full entitlement restored), or
- Used your home loan benefit, but had a foreclosure or compromise claim (also called a short sale) and repaid the VA in full
Other Facts of a VA home loan include:
- You can have more than 1 VA loan at a time.
- If you are receiving disability benefits from VA you can get a reduction or elimination in the funding fee.
- You can refinance other loan types into a VA loan, and remove PMI.
- Funding fee is always paid at closing by: buyer, seller, or it can be rolled into the loan.
- You must live in the property for at least 1 year before you can rent
- You cannot use VA loan for vacant land
- You can use it to purchase a multi-unit property as long as you live in one of the units.

Pros and Cons of Using Government Insured Home Loans

Pros of government-insured loans

They help you finance a home when you don’t qualify for a conventional loan
Credit requirements are more relaxed
You don’t need a large down payment
They’re open to repeat and first-time buyers

Cons of government-insured loans

Lenders require mandatory mortgage insurance premiums for many of these loans, which cannot be canceled
You could have higher overall borrowing costs
Expect to provide more documentation, depending on the loan type, to prove eligibility

Government-insured loans are ideal if you have low cash savings or less-than-stellar credit and can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for qualified borrowers.

Fixed Rate Mortgages

With a fixed rate mortgage, your monthly principal and interest payments stay the same throughout the life of the loan
You can more precisely budget other expenses month to month
You’ll generally pay more interest with a longer-term loan
It takes longer to build equity in your home.
Interest rates typically are higher than rates on adjustable-rate mortgages
If you plan to stay in your home for at least seven to 10 years, a fixed-rate mortgage offers stability with your monthly payments

Adjustable Rate Mortgages

Adjustable Rate Mortgages, or ARM loans, have fluctuating interest rates that can go up or down with market conditions
Many offer fixed rates in the first few years of homeownership
Your monthly mortgage payments could become unaffordable if interest rates significantly increase, resulting in a loan default
If the home’s value falls in a few years, it could make it harder to refinance or sell your home before the loan resets
If you don’t plan to stay in your home beyond a few years, an ARM could save you big on interest payments.

Other Home Loan Types

Construction loans: If you want to build a home, a construction loan can be a good choice. You can decide whether to get a separate construction loan for the project and then a separate mortgage to pay it off, or wrap the two together. Typically, the lender requires a minimum of 20% down payment to qualify. You must develop a comprehensive construction plan and show it to the lender. Also, a licensed appraiser must approve the projected home value.

State Bond Loan: State bond loans are paid out by using mortgage revenue bonds (MRBs). States use MRBs to incentivize first-time homebuyers to purchase. They do this by locking people in at below-market interest rates. To qualify, you must not have owned a home for a specific amount of time (usually three years). The homebuyer must meet the income requirements. The home must be within a certain value range. And you must be purchasing a primary residence.

Interest-only mortgages: With an interest-only mortgage, the borrower pays only the interest on the loan for a set period of time. After that time period is over, usually between five and seven years, your monthly payment increases as you begin paying your principal. With this type of loan, you won’t build equity as quickly, since you’re initially only paying interest. These loans are best for those who know they can sell or refinance, or for those who can reasonably expect to afford the higher monthly payment later.

Balloon mortgages: Another type of home loan you may come across is a balloon mortgage, which requires a large payment at the end of the loan term. Generally, you’ll make payments based on a 30-year term, but only for a short time, such as seven years. At the end of that time, you’ll make a large payment on the outstanding balance, which can be unmanageable if you’re not prepared.

FHA 203(k): The FHA 203(k) loan enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home. It insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. The rehabilitation cost must be at least $5,000, but the total value of the property must still fall within the FHA limits. There are two ways the property value is determined. The first is that the value of the property before rehabilitation plus the cost of rehabilitation. The second way is taking 110 percent of the appraised value of the property after rehabilitation, whichever is less.

This guide is for informational purposes only and rates, terms, qualifications can change at any time. Please speak with your lender to verify all information and to move forward with the application and approval process.