(847) 312-4151

Loan Options

Conventional Loan

The industry term “conventional loan” just means a loan that is NOT backed by the government. (VA, FHA, and USDA loans are examples of government backed or “non-conventional” loans.)

Instead, conventional loans are backed by private lenders. These lenders are typically banks, credit unions, and mortgage companies.

The exceptions to this rule are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

The other term you will hear is “conforming” loans. That simply means the loan “conforms” to guidelines set by Fannie Mae (FNMA) Needs to be FHLMC. These two government entities set mortgage lending guidelines and buy mortgages from lenders then sell them to investors.

Some basics:

  • To this day there is a common misconception that you must put down at least 20%. Truth is, you may be able to put as little as 3% down for a primary home purchase.
  • If you put down less than 20% you will be required to pay Private Mortgage Insurance (PMI). (This is just a policy that the buyer pays for to protect the lender in case of loan default.)
  • Typically requires good to great credit. (In comes cases you can qualify with as low as a 620 FICO score.)

Now let’s take a closer look at a few options you have when considering a conventional mortgage.

Conforming Conventional Loans

These loans meet dollar amounts set by the Federal Housing Finance Agency (FHFA). Their funding criteria follows Freddie Mac and Fannie Mae.

  • Great option for those with excellent credit
  • Lower interest rates with higher credit scores
  • Single family limit is now $766,550.00
  • High Cost: $1,149,825.00

Jumbo Conventional Loans

These loans allow borrowers to qualify for amounts far above traditional conventional loans. They are great for those who can afford a sizable down payment and have superb credit history.

  • Credit score higher than 700 or 720
  • 45% Debt-to-Income ratio (DTI)
  • Typically, down payment of at least 20% (in some cases 10%)
  • Higher closing costs and fees
  • Loan amount : $766, 551.00

FHA

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. FHA home loans require lower minimum credit scores and down payments than many conventional loans, which makes them especially popular with first-time homebuyers.

This type of loan offers low down payments, flexible financing, and no income restrictions.

Some basics:

  • The home must be your primary residence. (Cannot be a 2nd home or investment property)
  • Credit score of at least 580
  • Minimum 3.5% down payment
  • MIP (Mortgage Insurance Premium) is required. To allow these more flexible financing terms, borrowers are required to pay for mortgage insurance which protects the lender in the event the loan defaults. Your FHA loan MIP will involve two payments: an upfront premium and an additional annual payment. The amount you will pay for both depends on the size of your loan. There is an up-front premium (typically 1.75% of the loan amount) paid at the time of closing, and an annual premium which is escrowed and paid monthly.
  • Depending on your down payment size, the MIP is on for the life of loan. (Until you refinance to a conventional or sell the home.)
  • Can be 1-4 units!
  • The appraisal must meet the minimum standards.
  • Safety:The home should protect the health and safety of the occupants.
  • Security:The home should protect the security of the property.
  • Soundness:The property should not have physical deficiencies or conditions affecting its structural integrity.

Overall, this can be a great loan for those with less than perfect credit and need a little more wiggle room.

VA

What is a VA Loan?

A VA loan is a mortgage offered through the U.S. Department of Veterans Affairs. VA loans help U.S. servicemembers, veterans and eligible spouses become homeowners by purchasing or building a home, improving, or repairing a home, or refinancing a mortgage.

Your typical VA loan has many benefits that make it one of the easiest ways for military families to own a home. The VA home loan guarantee is an agreement that VA will reimburse a lender – including private banks, credit unions, mortgage companies and other lending entities – if the homeowner forecloses on the home. This guarantee also takes the place of a down payment. For that reason, it is a popular choice for military families.

Some additional benefits:

  • Competitively low interest rates
  • 100% Financing (No down payment required)
  • Expanded credit guidelines (More flexible)
  • Limited closing costs, that may be paid by the borrower, seller, or another party
  • No PMI or private mortgage insurance, which can reduce your overall monthly mortgage payment
  • There is one-time funding fee that is used to support the VA loan program. The amount of this fee depends on the down payment size and if you have had a VA loan before.
  • VA loans do not have loan limits, so long as the borrower can afford the property and it must appraise for at least the purchase price. If the prices exceed the appraisal, a down payment may be required.

USDA Rural Development

A USDA home loan is a zero down payment mortgage for eligible rural homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.

Loan guarantees: The USDA guarantees a mortgage issued by a participating local lender — similar to an FHA loan and VA-backed loans — allowing you to get low mortgage interest rates, even without a down payment. If you put little or no money down, you will have to pay a mortgage insurance premium, though.

USDA guaranteed home loans can fund only owner-occupied primary residences. Other eligibility requirements include:

  • U.S. citizenship (or permanent residency)
  • A monthly payment — including principal, interest, insurance and taxes — that’s 29% or less of your monthly income. Other monthly debt payments you make cannot exceed 41% of your income. However, the USDA will consider higher debt ratios if you have a credit score above 680.
  • Dependable income, typically for a minimum of 24 months
  • An acceptable credit history, with no accounts converted to collections within the last 12 months, among other criteria. If you can prove that your credit was affected by circumstances that were temporary or outside of your control, including a medical emergency, you may still qualify.

Non-QM (Non-Qualified Mortgage) loans are a category of mortgage loans that do not meet the qualified mortgage criteria set forth by the Consumer Financial Protection Bureau (CFPB). These loans are designed for borrowers who may not meet the stringent requirements of conventional mortgages, such as those with non-traditional income sources, lower credit scores, or high debt-to-income ratios. Non-QM loans provide an alternative for these borrowers to obtain a mortgage. Contractors, business owners, individuals with lower credit scores or even bankruptcies who have a chance at qualifying for a mortgage may typically qualify for non-QM loans. Many of these individuals could easily afford a mortgage payment despite the irregular paychecks, but they typically fail to qualify due to rigorous requirements for conventional loans.

What are non-QM home loans?

Nearly all home loans are qualified mortgages. (QM) That means lenders had to ensure their borrowers met strict standards laid down by the federal regulator, Consumer Financial Protection Bureau (CFPB).

The “ability-to-repay” (ATR) rule is central to those standards. It means lenders must check and document that each borrower can comfortably afford the monthly payments on their loans.

Lenders must do that using measures such as credit scores, debt-to-income ratios, and loan-to-value ratios. They also must ensure that borrowers have consistent and sufficient incomes.

Borrowers who need non-QM loans

Most homeowners clear these hurdles with greater or lesser ease. But members of a much smaller group stand little chance of ever getting a qualified loan.

Many of them simply have irregular cash flows. They might be self-employed, business owners, freelancers, or workers in the gig economy.

Others may have poor credit scores or a heavy debt burden. Some might have had a recent bankruptcy or foreclosure.

How non-QM loans work

People in those groups may be able to get non-QM loans. However, not all will. Lenders won’t lend to people they think stand little chance of paying them back.

Those lenders will generally be taking on a greater risk than with most borrowers of qualified mortgages. And they’ll require a higher reward to balance that risk.

So, mortgage rates, fees, and down payment requirements tend to be appreciably higher for these mortgages.

There are various types of non-QM loans, each catering to different borrower profiles and financial situations. Here are just a few.

  1. Bank Statement Loans:

  • Target Borrowers: Self-employed individuals or business owners with variable income.
  • Features: Lenders consider personal or business bank statements instead of tax returns for income verification.

  1. Non-Prime Loans:

  • Target Borrowers: Borrowers with credit challenges, such as recent foreclosures or bankruptcies.
  • Features: More flexible credit requirements compared to traditional mortgages. Interest rates might be higher.

  1. Investment Property Loans: (DSCR or Debt Service Coverage Ratio)

  • Target Borrowers: Real estate investors.
  • Features: Loans for purchasing or refinancing investment properties. Lenders will consider rental income for qualification.

  1. Interest-Only Loans:

  • Target Borrowers: Borrowers looking for lower initial monthly payments.
  • Features: Borrowers pay only the interest for a specific period (usually 5-10 years), after which they start paying both principal and interest.

  1. Asset Utilization/Depletion Loans:

  • Target Borrowers: Borrowers with significant assets but limited conventional income.
  • Features: Lenders consider the borrower’s assets as a source of income, allowing them to qualify for a larger loan amount.

It’s important to note that because these loans are considered riskier for lenders, they often come with higher interest rates and may have different terms and requirements. Borrowers considering non-QM loans should carefully evaluate their financial situation and work closely with a knowledgeable mortgage loan originator to determine the best option for their needs.