4 Common Mortgage Loans Programs
So you're ready to buy! But you need a mortgage to facilitate the process. Where to start?
For most of us, "mortgage" is not our first language, so let me help you out with a quick cheat sheet with four common loan types to give you an idea where to start and what questions to ask.
Different programs have different benefits. Some allow you to use smaller down payments. Others give you the best interest rates. It all comes down to risk for the lender. For example, smaller down payments are riskier loans because the borrower has less skin in the game.
Here are the factors that help the lender determine risk:
1| Down Payment
This is the amount of cash that you bring to the closing table (in addition to closing costs). The more down payment a borrower brings, the less risky the loan, which usually translates to a lower interest rate.
2| Credit Score
This is the score a lender uses to determine your likelihood of paying back the loan. The score is made up of your credit history, current levels of debt, types of credit used, length of credit history and the age of your accounts. Higher credit scores usually mean lower interest rates.
3| Debt To Income Ratio
Debt to income ratio (or "DTI") is the percentage of your monthly gross income that does toward paying debt, including your future mortgage payment. As you might guess, a lower DTI means you have more available income to pay your debts, rendering you a less risky borrower.
So, armed with the risk factors, let's look at each of the 4 common programs.
1| Conforming Loans
Features:
3-5% down payment is typical for a single-family property
FICO credit score of 620+ required
DTI not to exceed 50%
there are loan limits - $822,375 and less in LA County
This is a very common loan type in most parts of the country, but the program is limited to loans of $822,375. While this may not sound like much in Silicon Beach, it is a 7.4% increase over 2020 limits.
If you assume 5% down, you can shop for a property priced at $863,493. This works for condos and it works in certain adjacent communities. Your down payment in this case is $41,118.75. You'll also be responsible for closing costs. Private Mortgage Insurance ("PMI") may be required.
You can technically use a conforming loan for any priced property, but the loan portion can't exceed $822,375. You'll have to bring the rest in a down payment or second loan.
Lenders love these loans because they are the most straight forward and they are guaranteed by the federal government. Contact us now for conforming loan lender recommendations.
2| Jumbo Loans
Features:
10% down payment
FICO credit score of 700+
DTI not to exceed 43%
Reserves may be required
Jumbo loans are more common in Silicon Beach and West LA because they are used for bigger loans than allowed under conforming loans.
Jumbo loans are not guaranteed by the federal government, making them riskier loans for lenders, so lenders have stiffer requirements, including reserves, sometimes. Reserves are cash in the bank to cover some specified number of months for the mortgage. Contact us now for jumbo loan lender recommendations.
3| FHA Loans
Features:
3.5% down payment
FICO credit score of 580+
DTI not to exceed 50%
Extra fees
FHA loans are insured by the Federal Housing Administration under the US Department of Housing & Urban Development ("HUD"). The government is insuring the loan, so lenders are comfortable with lower down payments, lower credit score and higher DTI.
There are, however, extra fees involved with this kind of loan. The borrower will have to pay for PMI for the life of the loan (PMI under a conforming loan can be dropped when 20% equity in the property is achieved) plus a finding fee equal to 1.75% of the loan amount, paid as a closing cost out of pocket, or added to the loan amount. Contact us now for FHA loan lender recommendations.
4| VA Loans
Features:
0% down payment
FICO credit score of 620+
DTI not to exceed 60%
Extra fees are probable
VA loans are available to active-duty service members, vets and eligible surviving spouses to buy a primary residence. These loans are available from the US Department of Veterans Affairs and might be VA-funded or VA-guaranteed (the difference is who your actual lender is).
VA loans don't require PMI. They do, however, require a funding fee of 1.25% to 3.3%. There are available exemptions for the funding fee. Bonus! VA loans can be assumed by non-eligible borrowers, which will make you very popular when you sell your property. Contact us now for VA loan lender recommendations.
Summary
Conventional loans are usually the cheapest and easiest loans to get, but are capped at a relatively low amount for our area. Most borrowers in Silicon Beach use jumbo loans.
Are you thinking about buying? Your first step is to find a great agent familiar with your target area or type of desired property. That agent will introduce you to lenders they know can get the job done in our current competitive environment.
Should you consider an online lender? You might save a few bucks, but online lenders are not known for being fast and may not be able to perform within the timeframe you need to make a competitive offer. Save the online lenders for refi's when you're in control of the timeline.
Another pro tip if you're using a jumbo lender - use a mortgage broker rather than a commercial bank. Brokers have access to lots of different programs and investors. Banks typically have one program to offer you. Mortgage bankers are also more nimble and can more easily meet the aggressive timelines needed to make a competitive offer.
Want to talk strategy? Grab a convenient time on our calendar and let's strategize! We have several lenders we like and who we know can get the job done on a schedule that will be attractive to sellers.