If you’re planning to get great financing options for a home loan, let’s cover a few basics to get you sorted out.
Though conventional home loans may require you a 20 percent down payment for your new real estate, this doesn’t have to be the case.
In fact, the average first-time home buyer can do this at only 6% home equity. Some can even go for as little as 3% or zero down payment.
How is this possible?
We’ll be covering that and the financing options available for you to get the best deal in this article.
What this means for you as the aspiring homeowner is that you don’t have to plan for a hefty down payment thinking it’s conservative to do so.
Just be sure to secure two things – savings and your goals when home buying.
What are the 3 types of mortgages?
These would be Conventional, FHA, and VA loans. Each property loan type has something to offer whether it’s for first time home buyers looking to occupy or those into real estate investing.
Benefits of Conventional Financing
A conventional mortgage is a type of home loan that conforms to income and down payment requirements set by Fannie Mae and Freddie Mac.
Unlike FHA or VA loans, this is not backed by a government agency and requires a minimum 20% down payment.
Its advantage over other types of investment mortgage loans is that you have the option of not paying for insurance as well as other property financing options.
This type of home mortgage also allows you to opt for more than just an owner financing and extend to investment home mortgage for rental property.
Some types of home loans let you buy properties with zero down payments. The well-known ones are USDA (for rural and suburban) and VA loans.
However, choosing these options means you’ll need to pay cash to cover some or all of your closing costs.
How much is a down payment on a house with conventional financing?
The amount you’ll need will depend on the type of property loan and your initial home equity with those options.
With a conventional loan, you can start as low as 3 to 5% down payment. With a $300,000 house, you can expect $9,000 to $15,000.
When opting for an FHA loan, you’ll need to buy with a $10,500 down payment for the exact same house since the requirement is 3.5%.
Of course, the low down option comes with a monthly cost – the mortgage insurance. To qualify for zero insurance cost, you need to go for a 20% down payment or $60,000 in this example.
Conventional, FHA, and VA loans are your typical financing options for when you’re acquiring a new piece of real estate.
Each one has its fair share of advantages and we’re here to run you through each one so you can pick the best type of home loan for your situation.
You mainly get varying possibilities when you’re looking for financing options for an investment property or vacation home.
Categories of Conventional Mortgage
The Federal Housing Finance Agency sets a maximum loan amount and, if you get a conventional loan that meets standards with an amount lower than that, this is called a conforming loan.
As Fannie Mae and Freddie Mac are sponsored by the government, this type is also known as “GSE loan”.
When a conventional loan exceeds loan limits or deviates from the standards set by Fannie Mae and Freddie Mac, this is now a nonconforming conventional loan.
A common loan program you may encounter is the jumbo loan which is used in the majority of US counties for loaning homes whose value exceeds $484,350.
Whatever house mortgage you opt for, you’ll be required to pay interest as mortgage rates. When you get a fixed-rate conventional loan, the interest remains the same across the many years you hold the mortgage.
Most buyers opt for a 30-year fixed-rate conventional loan for this reason and save on monthly payments in the long-term. Shorter terms are still available though.
This type of conventional loan is a good alternative to fixed-rate loans. With an adjusted-rate mortgage, also known as ARM, you have rates that are subject to changes over time.
These are usually adjusted annually after the initial 3, 5, 7, or 10 years.
Also known as the 80/20 conventional loan, this allows you to go below the standard 20% down payment with the options being 3, 5, and 7%.
- Renovation loans
With a tight budget, you may not be able to find a house you like. Going for a fixer-upper is a good way to get a family home for a lower price and move in when you’re ready for the renovation.
With this loan, you hit two birds with one stone – owner financing for the home purchase and the needed renovations as well.
Here are the minimum requirements for a conventional loan for the year 2020.
Certificate of eligibility
This is needed for VA loans only and qualified lenders (military personnel and veterans) can apply for one online.
Conventional and VA loan providers require a score of 620. Homebuyers on FHA loans who make a 3.5% down payment will need a minimum credit score of 580 and can go as low as 500 when making a 10% down.
For VA loans, a funding fee is charged to settle the cost of the program to taxpayers. Military borrowers who have disabilities due to their service may qualify for a waiver. In 2020, funding fees increased by 0.15% for borrowers who put down 10% or less of the purchase price. That translates to an extra $1,500 in fees for every $100,000 being borrowed.
Debt-to-income (DTI) ratio
Borrowers with a DTI of 455 or higher need to have a credit score of 740 or higher. In some cases, conventional lenders may reconsider.
For FHA loans, the requirement is below 31% for the front end which includes costs of housing such as the monthly house mortgage payment, insurance, and property taxes.
The back end ratio required is below 43%. This looks at debt such as mortgage payments, credit cards, car loans, and other debt payments.
VA loans require a ratio of 41% or lower.
Conventional financing can be your means to purchase a primary residence, your second home, or vacation home or an investment property you intend to monetize/rent out.
For FHA, the home must be your primary residence for the first year at a minimum once you purchase it. This is ideal for your first family home.
VA loans only apply for primary residences.
Mortgage Insurance and Rates
Mortgage insurance or Private Mortgage Insurance (PMI). This is required for conventional financing with less than 20% down payment.
Credit score should be at least 620. The yearly premium is anywhere between 0.15% to 1.95% of your loan amount yearly and can go as high as 2.5% if your credit score is low.
With FHA loans, this is a one-time premium of 1.75% of loan balance coupled with an annual Mortgage Insurance Premium MIP of 0.45 to 1.05%. For VA loans, no PMI is required.
No loan insurance fees exist for VA loans.
Employment and Income
Mortgage lenders will require proof of steady income and will take a good look at your employment history and income from the past two years.
Loan applicants who are self-employed or with variable income will need to provide documents to verify income.
Majority conventional loan providers do not set income limits.
However, Fannie Mae’s HomeReady and Freddie Mac will require that borrower’s income falls within the income limits for the local area when it comes to Home Possible loans.
For FHA loans, the limit is capped at $331,760 as opposed to $510,400 in most states.
The minimum down payment is 3% for conventional financing with premiums for private mortgage insurance.
It’s 3.5% for FHA loans or 10% if you have a credit score between 500 and 579.
Down payment for VA loans is zero but may exist if it exceeds standard amounts.
What is the best investment home loan rate?
There may be no single best property financing option, but this isn’t possible with FHA or VA loans. Depending on your goals, conventional loans can dive as low as 3% down payment or allow for zero insurance with a 20% down payment. Just be sure to be transparent about your plans with your loan officer.
If you’re planning for a down payment on your property mortgage today, consider more than just how much you can afford.
The whole transaction will need you to check your tolerance for risk on the loan you’re taking. Low down payment means low home equity.
You can discuss this with your broker to consider your long-term plans.
Loan officers may request for details on your current job, position, and compensation. Expect a verification process as part of the loan program when getting started on your property financing.
Also, note that considerations may be different for financing an investment property as opposed to financing as a first-time homebuyer.
Finally, when you have gathered your paperwork for the loan application, compare mortgage rates among different mortgage lenders.
Get a good loan overview for planning your first home purchase or various loan programs you’re considering in the long term when you’re hashing out your financial goals.
We hope you got the information you needed for your next house loan. Feel free to reach out to us for any questions you may have so we can set you up for a suitable plan based on your needs.