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How Can Non-Conventional Loan Fulfill Your Home Buying Dream?

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How Can Non-Conventional Loan Fulfill Your Home Buying Dream?

Before assuming a mortgage is unaffordable, potential homebuyers need to educate themselves and find what can they qualify for, and then make the decision if a home is affordable or not.

It is important to understand that apart from conventional, or traditional mortgage there are other options available like non-conventional loans.

WHAT DOES IT MEAN?

These loans are backed by different departments of the U.S. government, so in the case that the borrower defaults on his loan the government protects the lender.

Be it first-time homebuyers, low-income earners, or people who have serviced the U.S. government in the past can now get a mortgage through non-conventional loans because of its relaxed eligibility criteria.

TYPES OF THESE LOANS

FHA loans — are insured by the Federal Housing Administration in the U.S. With a minimum credit score requirement of 500 and a down payment of 10%, and a minimum credit score of 580 for a down payment of only 3.5% one can qualify for an FHA loan.

But in most cases, the borrower has to pay mortgage insurance throughout the life of the loan.

VA Loans — are backed by the Veterans Affairs department of the U.S. government.

They are available only to service members, veterans, or spouses of a military service member or veteran.

There is no specified credit score or downpayment requirements with VA loans. Neither do they require the borrower to pay mortgage insurance premiums.

But, if the appraised value of the home exceeds its market value then a down payment needs to be made. Which will be equal to the difference between the two.

The borrower is also required to pay a funding fee with VA loans.

USDA Loans — are backed by the U.S. Department of Agriculture. They are made to encourage homeownership for individuals living in rural areas.

To qualify for this loan, the property must be in a town with less than 20000 people.

There are no credit score or minimum down payment requirements, but the income of the borrower must be less than 115% of the median county income it wants to qualify for a USDA loan.

A mortgage insurance premiums too will have to be paid throughout the life of the loan.

Conventional loans are backed by private lenders and not by the U.S. government.

Hence borrowers pay private mortgage insurance on them. Conventional loans have two types of loans: conforming loans and non-conforming loans.

The conforming loans are under the limit set by the Federal Housing Finance Agency, and meet the necessary criteria to be purchased by Fannie Mae and Freddie Mac.

Non-conforming loans do not meet these criteria and exceed the FHFA limit.

Credit score requirement — For a conventional loan, the credit score must be at least 620. Whereas with non-conventional loans a lower requirement of 500 for FHA loans and no credit score requirements for the other types.

Down payment — Borrowers can choose to put a down payment of only 3% with conventional loans.

But because it is less than 20%, they need to pay private mortgage insurance. VA and USDA loans have no minimum down payment requirement, with a minimum of 3.5% FHA loans is offered.

Interest rates — The interest rate, and mortgage insurance fees charged for the low down payment of conventional loans are larger than for non-conventional loans.

Mortgage Insurance — For conventional loans, borrowers only have to pay private mortgage insurance until they reach a loan to value ratio of 78% or if they choose to refinance their loan after they have built 20% home equity.

FHA loans require borrowers to pay mortgage insurance throughout the life of the loan if they put less than 10% down payment, or pay insurance for 11 years if they put a minimum of 10% down.

USDA loans require payment of mortgage insurance premiums throughout the life of the loan, and VA loans do not ask for any mortgage insurance.

Loan Term — Non-conventional loans offer loan terms of 15 or 30 years, and conventional loans give more options with loan terms of 10, 15, 20, 25, and 30 years.

Even, if a borrower has not built creditworthiness or saved for a 20% down payment they can still dream of buying a home with the help of non-conventional mortgages.

Reference Source: Florida News-Times

https://www.compareclosing.com/mortgagenews/how-can-non-conventional-loan-fulfill-your-home-buying-dream/

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