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The Federal Housing Administration, which is part of the Department of Housing and Urban Development, backs FHA loans. The FHA insures FHA loans, which means that the organization protects your lender from a loss if you default on your loan.
FHA loans feature low down payment options and lower minimum credit score requirements, but you must also pay mortgage insurance. Although you don't have to be a first-time purchaser to qualify, the possibility of a low down payment and more relaxed credit standards can make FHA loans particularly appealing for first-time homebuyers.
Here are some of the advantages of FHA loans:
- When compared to other loans, the credit score requirements are lower.
- Your lender may be willing to take a smaller down payment.
- If you have a bankruptcy or other financial troubles in your past, you may still be eligible for an FHA loan.
- Closing costs are frequently included within your loan.
A conventional mortgage loan is not backed or insured by the federal government. Most conventional mortgage loans are "conforming," which essentially means that they fulfill the conditions for sale to Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored firms that buy and sell mortgages to investors. This frees up lenders' capital, allowing them to place more qualifying homebuyers in a home.
Conventional mortgages can also be non-conforming, which means they do not fulfill the requirements of Fannie Mae or Freddie Mac. A jumbo loan is a type of non-conforming conventional mortgage that surpasses conforming loan limits.
Because there are several different sets of guidelines that fall under the umbrella of “conventional loans,” there’s no single set of requirements for borrowers. However, in general, conventional loans have stricter credit requirements than government-backed loans like FHA loans. In most cases, you’ll need a credit score of at least 620 and a debt-to-income ratio of 50% or less.
A VA loan is a government loan that is backed by the Department of Veterans Affairs (VA). The VA provides particular assurances to private lenders that operate with VA loans. Because of these guarantees, lenders will provide loans with no down payment or with less restrictive standards than conventional loans.
The VA does not originate VA loans, but it does determine who qualifies for them and which lenders issue them. There are several types of VA loans, and because they are guaranteed by the government, they offer less of a risk to lenders.
Because of its lenient credit standards, VA loans are considered non-conforming loans. They have several advantages over traditional loans, including lower interest rates, fewer borrowing limitations, and no down payment required. VA loans also do not have monthly mortgage insurance.
A Non-Qualified Mortgage (Non-QM), is a home loan designed to help homebuyers who can't meet the strict criteria of a qualifying mortgage. For example, if you are self-employed or don't have all the necessary documentation to qualify for a traditional mortgage, you might need to look at non-qualified mortgages. Call us for more information.
PMI is only required for conventional loans, which are not backed by a government program.
Conventional loans are classified as "conforming", which means they meet the criteria to sell to Fannie Mae or Freddie Mac. On conventional loans with a down payment of less than 20%, PMI is usually required.
As part of your monthly mortgage payment, you'll pay a portion of your annual premium (PMI) each month.
Mortgage insurance, or MIP, is a requirement for FHA loans, which are backed by the Federal Housing Administration. Regardless of the size of your down payment, all FHA loans need MIP.
Both an upfront mortgage insurance premium (UFMIP) and an annual premium payment, or annual MIP, are required for FHA loans.
The cost of UFMIP might be factored into your loan amount. MIP is paid on an annual basis as part of your monthly mortgage payment.