Loan Type Comparison

Selecting a loan type can be a daunting task. Below are the requirements and comparison of the most popular loan options [1] Conventional [2] FHA [3] VA or [4] USDA loans.

These are the standard mortgage options; however, lenders may have access to either Federal or State sponsored loans that offer a wide variety of assistance to homebuyers that meet certain income criteria. These programs may offer lower interest rates or down payment assistance.

Ideally, the mortgage type should reflect maximum purchasing price with the best utilization of required cash.

The following chart is general mortgage information for an owner-occupied, single family, primary residence. Not applicable for purchasing a vacation or investment property.

Note 1. Maximum Loan Amounts

AskChristee Modules contain all of the above Mortgage Requirements and Regulations.

Conventional loans have a maximum loan limit based upon a given area, any loan amount above that limit is considered a Jumbo Loan. Conventional Jumbo Loans may require additional down payment and higher interest rates. Lenders will offer different Conventional Jumbo Loans programs.

FHA loans have a maximum loan amount based upon of the location of the property. FHA loan amounts cannot exceed these limits.

VA loans have a maximum loan limit amount based upon an area, above that amount, is considered a Jumbo loan. Not all lenders will offer VA Jumbo loans.

USDA does not have a maximum loan amount. However, USDA does have maximum income limits which limits the price home and mortgage amount.

Note 2. Minimum Down Payment

First time Homebuyers or buyers with incomes that do not exceed acceptable levels may qualify for a 3% down payment. Otherwise, a 5% down payment is required on conventional loans.

Note 3. Mortgage Insurance Requirements

Conventional loans with less than a 20% down payment require private mortgage insurance which is referred to as PMI.

All FHA loans require mortgage insurance.

All USDA Loan require mortgage insurance.

PMI is based upon the LTV and credit score, and may be less expensive than FHA. USDA mortgage insurance is generally less expensive than FHA.  After a period of time, PMI coverage may be dropped on a Conventional loan but not on an FHA or USDA loan. Required Mortgage insurance is part of your monthly payment.

Note 4. Mortgage Insurance Premiums

Mortgage Insurance Premium on conventional loans (PMI) will range from 1.61% to .1% (.0161 to .001) of the loan amount annually. The premium is based upon factors such as credit score, loan-to-value ratio, and term of loan. PMI rates may vary from Lender to Lender. Private mortgage insurance is also available for vacation or investment properties at slightly higher rates.

FHA mortgage insurance is referred to as MMI (Mutual Mortgage Insurance). The premium is based upon the loan amount, loan term, and loan-to-value ratio. Typical FHA mortgage insurance premium is .85% (.0085) of the loan amount annually paid monthly.

Mortgage insurance on a USDA is approximately .35% (.0035) of the loan amount annually.

Note 5. Credit Scores

Required credit scores are not absolute but rather typical required minimum scores by loan type.  Lenders may accept lower scores based upon their lending practices or other circumstances. There are many factors that combine with credit score in mortgage underwriting (loan approval) such as: (a) down payment, (b) cash reserves, (c) job stability, (d) earnings, (e) payment or debt ratios, and (f) other compensating factors.

Note 6. Funding Fees

FHA loans require an upfront MIP fee, which is approximately 1.75% of the loan amount. This amount is added to the base loan amount for total loan amount.

VA loans require (except disabled vets) a Funding fee, which ranges from 1.4 to 3.6% of the loan amount. The VA funding fee is based upon factors such as first-time VA borrower and the loan-to-value of the loan. The typical VA funding fee is 2.3% of the loan amount.

USDA loans require a 1% funding fee. 

The funding fee amount is added to the base loan for total loan amount. Monthly principal and interest payments are based upon the total loan amount. These fees can be paid in cash at closing but are generally financed.

Note 7. Income Limits

USDA loans are more applicable for low to moderate-income households. Income limits are based upon geographical area.

Note 8 Geographic Consideration

All loan types, except USDA, are available everywhere in the US. USDA loans are restricted to rural areas and are not available for urban areas.

Note 9. Seller Concessions

Seller concessions on conventional loans are based upon loan-to-value.

Note 10. Asset Limitations

Conventional Loans, FHA, and VA loans do not impose a limit on borrower assets. Lenders may require borrower to have two to three months of payments in reserve after closing.

USDA may look at potential income from as bank accounts or other investments in determining total annual income. The total income cannot exceed income limits for that area.

Note 11. Qualifying Ratios

These ratios are estimates only and will differ amongst lenders. The ratios shown are total debt to income ratios. A debt ratio of 40% would allow total monthly debts (including house payment) of $2,000 based upon monthly income of $5,000. Thus, if you had a $400 car payment then you could afford a mortgage payment of $1,600 ($2,000-$400).

Contrary to what you may read elsewhere, they are no hard absolute income qualifying ratios. The mortgage approval process is referred to as loan underwriting. Most loans are underwritten (approved or rejected) in one of several automatic (computerized) underwriting systems – DU, LP, or AUS. Loans that are not underwritten within one of these systems are said to have been manually underwritten. When loans are manually underwritten the lender or the underwriter will establish acceptable payment and debt ratios (also referred to as the front and back ratios).

Each loan type has mortgage guidelines. Conventional loans will have different guidelines than FHA or VA loans. These guidelines allow for some degree of flexibility when manually underwriting a loan. Based upon an 800-credit score, one lender may allow 45% debt ratio whereas another lender may only allow a 43% debt ratio. Mortgage underwriting is a combination of science (guidelines) and art (interpretation of the guidelines).

Note 12. Income Limits

FHA, or VA loans do not have income limitations. Only Conventional loans with 3% down, and USDA loans, have income limitations which are based upon the area you wished to purchase. Note not all areas are eligible for USDA loans.

Note 13. Required Cash

The Best Way to Evaluate Mortgage Options is to Run AskChristee Modules Buyer PreQual or Buyer Choice and then Review with a Lender.

Borrowers must provide evidence of available cash for down payment and closing cost. Closing cost may offset by either lender or seller concessions within program guidelines.

How to evaluate different loan options

First-time homebuyers loan selection considerations:

Selecting the most appropriate loan type is not as complicated as you may imagine. It is really more a process of elimination.

Veterans who have VA loan eligibility will almost always utilize a VA loan for their first home purchase. VA loans allow for greater flexibility in underwriting and the Veteran can borrow 100% of purchase price.

If you can meet the income limitations and wish to purchase in an USDA eligible area, USDA is a great option. A USDA loan has an upfront fee and monthly mortgage insurance. However, both of these fees are less than FHA.

If you have reasonably good credit (640 and higher) then a conventional loan with a 3% down payment is a very good option. A conventional loan could have a lower monthly mortgage insurance when compared to an FHA loan.

The final option is an FHA loan. An FHA loan offers more flexibility in underwriting and credit scores when compared to a Conventional loan. FHA loans have an upfront premium plus monthly mortgage insurance. The FHA maximum loan amount is normally sufficient for a first time homebuyers.

2nd Home Purchase Loan Selection Considerations

Assuming you have maintained a reasonably good credit score (640 or higher) then your best option is a conventional loan. If you credit score is lower than 620-640, you should talk to several lenders or mortgage brokers regarding their access to conventional loan programs with less stringent credit score requirements. These loans may have a slightly higher interest rate but may still compare favorably to an FHA loan.

If you have less than a 20% down payment and your credit score is less than 640 then consider an FHA loan. A potential disadvantage of an FHA loan is the maximum loan amount which is based upon location. The maximum loan amount will vary from county to county within the same state.

Veterans. When purchasing their 2nd home, a Veteran should consider a conventional loan. The 2nd VA loan will have a higher funding fee whereas a conventional loan does not have a funding fee. However, if the Veteran is seeking to borrow more than 80% of the purchase, then a VA loan may be the best solution – due to monthly mortgage insurance.  The Veteran should consider another VA loan if they (a) want a 100% loan or (b) their credit score is below 640.

USDA loans are normally not a viable option when purchasing your 2nd or 3rd home.