A conventional loan is a loan that is not insured by a government agency, such as the FHA or VA. These loans require Private Mortgage Insurance (PMI) to protect the lender from borrower default if the down payment is less than 20%. If you have a credit score in the mid-600's or higher then a conventional loan may be for you.There are several key differences when comparing FHA and conventional mortgages. For one, FHA loans are easier to qualify for because of their low credit score and down payment requirements. FHA loans require just a 3.5% down payment making them an attractive option for first time home buyers and any buyer without a 20% down payment. FHA loans require mortgage insurance regardless of the down payment. Conventional loans allow you to avoid paying PMI if you have at least a 20% down payment, making conventional loans more attractive to borrowers with higher down payments.
FHA loans comprise of several different loans. Whether it's purchase loans, home construction loans, or streamlined refinance loans, the Federal Housing Administration can insure these loans if you qualify. FHA loans are quite popular, as they are utilized for roughly 25% of all loans issued across the country.
The reason for this is the benefits received by using an FHA loan. These benefits include a low down payment (potentially only 3.5%), seller concession allowance of a maximum of 6%, lower credit score requirements (as low as 580), and these loans are assumable.
There is a suitable loan type for every borrower dependent on the borrowers needs and qualifications, and for veterans a VA loan may be their best option.
VA loans are backed by the U.S. Department of Veterans Affairs and are designed to assist active-duty military, veterans, and and other groups of military personal become homeowners at a cost they can afford.
One major benefit of a VA loan is there is no requirement for a down payment, no mortgage insurance requirements, and offers a level of flexibility regarding qualifying guidelines that cannot be found elsewhere.
Here are a few other benefits of acquiring a VA Loan.
VA loans require neither a down payment nor mortgage insurance. That makes this a VA-backed mortgage very affordable upfront and over time.
Government Guarantee- This makes VA loans attractive to lenders, because they are assured that if the borrower defaults for whatever reason they will be paid a portion of the loan amount significantly lowering their risk.
Variety- VA loans can be used to purchase a home, condo, manufactured home, newly-built home, duplex, and other types of properties. In addition, VA loans can utilize a fixed rate or an adjustable rate.
Easier Qualifications- VA loans do contain credit requirements, income requirements, and other forms of documentation. However, these requirements generally are less burdensome than conventional loans.
Assumable Loans- Many VA loans are assumable, meaning if you decide to sell your VA-backed home, the future buyer will assume the loan you were approved for if they are also VA-eligible, making it much easier to sell your home. This is especially true if you obtain a low rate and rates rise in the future.
Stated-income loans are designed for self-employed individuals or those who are unable to provide W-2's as a means of verifying their income. Lenders rely on bank statements and credit scores to determine your borrowing worthiness. Generally, credit scores in the mid-high 700's are sought after assuming you have not had any negative credit events. Stated-income loans typically have higher interest rates than conventional loans, mainly because lenders do not have as much information on your income without the providing of W-2's. Other requirements are you cannot be a first-time buyer and you can make yourself a better candidate if you put a large portion of your loan as a down payment for a single-unit. owner-occupied property. If you do not have a social security number you can receive an Individual Taxpayer Identification Number (ITIN) from the IRS to complete the process.
Here are some other tips to make yourself an ideal candidate for a stated-income loan
Increase Your Credit Score As Much As Possible
No matter what the borrowing situation is, having a good credit score makes you a more trustworthy candidate to repay the loan and helps you qualify for a lower interest rate upon approval.
Make A Large Down Payment
Having more equity in the home increases your accountability in making the mortgage payments on time and in full even when times are tough. This is what lenders want to see and it'll help convince them you aren't going to walk away from a home in which you have placed a lot of your own money into.
Have Some Money Saved Up
Having cash reserves in an emergency fund quells lender's worries about you being unable to make your payment if something happens to your business until you are able to recover.
Pay Off Your Personal Debt
The less monthly debt obligations you have the better. This includes car payments, credit card debt, and other personal loan debt. Paying these off or greatly reducing the amount of these debt obligations not only increases your credit score but also can give you a better interest rate from a lender.
Provide Other Necessary Documentation
Although you won't be required to provide W-2's, lenders will require other forms of documentation. Be prepared to provide these documents. These documents help the lender better understand your financial situation and makes the lender more understanding and knowledgeable about your situation. Lenders will not lend if they don't feel comfortable lending their money out.
Hard Money Loans
Hard money loans short-term loans that real-estate investors use to finance investment projects. This type of loan is ideal for house flippers or developers who are seeking to renovate or develop a property and then sell it upon completion, for a profit. These loans typically are offered through private lenders, as banks and other major financial institutions generally do not offer them.
Another major difference between hard money loans and conventional loans is the basis for issuing them. Hard money lenders do not base their determination of worthiness on the borrowers credit, but they base it off of the value of the property itself. Lenders look at the value of the property after the property is repaired or developed, and use that to make the final determination.