A conventional loan is a mortgage that follows the Fannie Mae or Freddie Mac guidelines and is not insured or guaranteed by the federal government. It may have a fixed or adjustable rate. Typical conventional loan lengths are 15, 20, 25, or 30 years.
Conventional loans offer more favorable terms for the borrower, but there are stricter guidelines to adhere to in order to obtain a conventional loan.
A borrower must have at least a 5% down payment to qualify for a conventional. There are specific gift guidelines as well (ex: you must provide at least 3% of the down payment and a gift can make up the remaining 2%).
A conventional loan requires a borrower to have mortgage insurance if the down payment is less than 20%. This mortgage insurance goes away once the borrower’s remaining loan balance is 78% of the value of the house (ex: $100,000 value | $78,000 loan balance = 78% loan to value (LTV)). The mortgage insurance rate is based on your credit score and is significantly lower than federal government loan programs (FHA=1.35%).
If you have a bankruptcy or foreclosure in your financial history, conventional loans have longer waiting periods before you are eligible to purchase a house. The typical waiting periods are:
- 7 years for a foreclosure, and
- 4 years for non-Chapter 13 bankruptcies.
Federal Housing Administration (FHA)
An FHA loan is a mortgage insured by the federal government in case of borrower default. Because of this government insurance, there is less risk to lenders and investors, which results in FHA loans being available for more borrowers. The interest rates are typically lower with FHA loans, but there are other fees that make these loans more expensive than conventional loans.
The guidelines for borrower eligibility are less strict than a conventional loan, which makes this program popular with first-time home buyers. FHA recommends borrowers have above a 620 credit score in order to qualify.
The down payment requirement is only 3.5% and any amount may come as a gift.
The borrower will pay mortgage insurance on the loan. If the down payment is less than 10%, the borrower pays 1.35% of the loan value for the life of the loan. If the down payment is more than 10%, the mortgage insurance of 1.30% is only required for 11 years.
The borrower is required to pay an upfront fee, regardless of down payment and credit score, of 1.75%. This can be financed into the loan.
FHA does have an Energy Efficient Mortgages Program, which allows borrowers to finance 100% of the cost to make their home more energy efficient.
The bankruptcy and foreclosure waiting periods required for FHA loans are shorter than conventional loans. The waiting periods are:
- 3 years after discharge of foreclosure
- 2 years after discharge of bankruptcy
- There is a program called “Back to Work,” which can shorten or waive the foreclosure and bankruptcy waiting periods if the borrower’s foreclosure or bankruptcy was a result of financial difficulty due to extenuating circumstances.
- The death of a spouse or medical emergency can also cut the waiting period to 1 year.
US Department of Agriculture (USDA) Guaranteed Rural Housing Loan Program
The USDA provides loans to borrowers seeking housing in rural areas that meet the USDA lending guidelines.
The property must be located in a rural area with no more than 20,000 people and be a certain distance from any metro area. Click here to see check the eligibility of a property.
The borrower must also meet the income limits imposed by the USDA. The borrower’s (and any co-borrower) adjusted income must not exceed 115% of the county’s median family income. There are adjustments available for specific situations that may help a borrower qualify. Call a Gershman Loan Officer for more information.
The USDA loan program allows for 100% financing, including closing costs.
There is an upfront fee of 2% required to be paid by the borrower and can be financed into the loan. The borrower must also pay a 0.40% mortgage insurance fee. *Important note: The mortgage insurance fee will increase to 0.50%, effective October 1, 2014.
The USDA loan program has flexible credit standards, but it is recommended that borrowers have at least a 640 credit score.
Department of Veterans Affairs (VA) Home Loan Program
Borrowers who have spent time in the military may be eligible for a VA loan. The eligibility requirements are set by the Department of Veterans Affairs and can be found here. Instructions to obtain the required Certificate of Eligibility can be found here.
The VA loan is guaranteed by the Department of Veterans Affairs up to a specific amount to reduce the risk placed on lenders and investors. This allows veterans who have served their country the opportunity to obtain a home if they do not qualify for other loan programs.
The VA program has flexible credit standards for borrowers. There is not a mortgage insurance requirement, but borrowers do have to pay a funding fee.
This funding fee amount depends on the down payment and whether the loan is the first or subsequent loan for the veteran. The fees are detailed below.
|Type of Veteran||Down Payment||Percentage for 1st Use||Percentage for Subsequent Use|
|Regular Military||None5% +10% +||2.15%1.50%1.25%||3.30%1.50%1.25%|
|Reserves/National Guard||None5% +10% +||2.40%1.75%1.50%||3.30%1.75%1.50%|
Cash-Out Refinancing Loans
|Type of Veteran||Percentage for 1st Use||Percentage for Subsequent Use|
|Type of Loan||Percentage for Either Type of VeteranWhether First Time or Subsequent Use|
|Interest Rate Reduction Refinance Loan (IRRRL)||0.50%|
|Manufactured Home Loans||1.00%|
Other Loan Programs
Gershman Mortgage is able to provide other loan programs, such as the FHA 203(k) Rehabilitation Loan program and adjustable-rate mortgages. If there is a loan program you wish to learn more about, call a Gershman Mortgage Loan Officer (link to contact us) for more details.