FHA, VA … OMG! When you start to learn about mortgage loans, it can be a little like learning a new language. We created this cheat sheet about 4 common loan types to give you a quick way to know what you’re likely to qualify for and what you might want to choose when you start to shop for a loan.
The type of mortgage loan you qualify for depends on factors including:
+ The amount of your down payment: the percentage of the purchase price that you will pay at closing.
+ Your credit score: a score lenders use to determine the risk of loaning you money. The score relates to your credit payment history, current level of debt, types of credit used, length of credit history, and new credit accounts.
+ Your debt to income ratio: the percentage of your monthly gross income that goes toward paying debt, including your future mortgage payment.
To understand the differences between these 4 loan types, let’s first look at what “conventional” means. This is simply a way of referring to loans that are not guaranteed or insured by a government agency, such as the Federal Housing Administration (FHA) or Veterans Administration (VA).
Conforming loan: The most common type of home loan, conforming loans are conventional loans that meet guidelines set by the Federal Housing Finance Agency for loans to be acquired by government-sponsored enterprises Fannie Mae and Freddie Mac, including a maximum loan limit.
Jumbo loan: Jumbo loans are conventional loans that exceed the conforming loan limit, making them “non-conforming.” Therefore, they’re often used when the price of the home is more than the average median home price in the region. These loans are not backed by Fannie Mae and Freddie Mac. Because there is a higher risk for the lender due to the larger loan amount, jumbo loans are more difficult to qualify for than conforming loans.
FHA loan: FHA loans are insured by the Federal Housing Administration, part of the US Department of Housing and Urban Development (HUD). Because the government is insuring the loan, which offers security to the lender, borrowers with smaller down payments and lower credit scores may qualify most easily for this type of loan. However, the borrower will pay Private Mortgage Insurance (PMI) for the life of the loan. In addition, FHA loans require a funding fee equal to 1.75% of your loan amount—this fee can either be paid out of pocket or added to your loan amount.
VA loan: VA loans help active-duty service members, veterans, and eligible surviving spouses buy homes. They’re available through a program of the US Department of Veterans Affairs and can be either VA-funded (where the VA is your lender) or guaranteed by the VA when your lender is a private company. These loans can fund the entire purchase price of the home and don’t require PMI. Similarly to FHA, the VA requires a funding fee of 1.25% – 3.3% of your loan amount, depending on your level of down payment, the type of your service, and whether or not this is your first VA loan.
Now that you’ve learned the ABCs of 4 common loan types, you’re ready to talk with lenders about the specifics of your situation. All of these loan types can have either fixed or adjustable rates, and those are some of the details to ask about during your search for your best mortgage.
Ready to get started on a mortgage loan?
1201 Western Ave
1st Floor, Mezzanine
Seattle, WA 98101