Loan programs have different costs and qualifying requirements. Here are some tips to help you choose what's best for you based on your qualifying criteria and the property. FYI-this article will not include any down payment assistance program info. That will be covered in a different article.
Quick tips on the 4 most common loan types
The 4 most common loan types with their minimum down payment are listed below.
Conventional (Fannie Mae & Freddie Mac), FHA and VA have no maximum income limits --USDA does have income limits based on property location and family size. FHA has loan limits based on County location with the floor as of June 2024 currently being $498,527 for a single family home with high cost counties as much as $1,149,825. Conventional loan limits for a single family are a floor of $766,550 with high cost counties as much as $1,149,825. VA has no loan limits when a vet has full entitlement. Consult your loan officer of choice for more specifics on maximum loan amounts.
An additional loan type-- Jumbo --is typically anything above individual county loan limits, however some lenders may allow jumbo loan amounts as low as $400k. Jumbo fixed rates are typically higher than conventional or government rates with the exception of certain adjustable rate products offered by some lenders on jumbo. Jumbo loans also will have more restrictive underwriting guidelines than other loan programs-making it more difficult to qualify for marginable borrowers.
Loan programs in more detail
Conventional loan info
Fannie Mae and Freddie Mac are the 2 agencies that set minimum rules (guidelines) for conventional loans eligible to be purchased from lenders. This process of selling loans
to Fannie & Freddie that meets their guidelines allows lenders to offer loans at the best rates available and this long standing practice is crucial to the stability of the mortgage market.
Conventional down payment requirements are as little as 3% of the sales price. No income limits with debt ratio (housing and credit debts compared to gross provable income) as high as 50%. Credit scores as low as 620, however if a credit score is on the low side, with a low down payment scenario (less than 20% down) it is typically cheaper to go with a FHA loan. Conventional will allow loans for investment properties while VA, FHA and USDA do not.
Conventional is more relaxed when it comes to property condition and inspection requirements although it is important to keep in mind any property with health and safety issues present --a lender can require inspections and repairs as a condition of the loan. On a conventional loan an appraiser would typically be the determining factor if health and safety conditions exist. Even though Fannie and Freddie leave it up to the appraiser, some lenders will have policies of requiring inspections & clearances if these items are listed in the sales agreement as a condition/contingency of the sale.
See the property condition blog posts HERE for more details.
FHA loan info
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA).
FHA insurance protects mortgage lenders, allowing them to offer loans with low interest
rates, easier credit requirements, and low down payments (starting at just 3.5%). Thanks to their flexibility and low rates, FHA loans are especially popular with first-time home buyers, home shoppers with low or moderate incomes, and/or lower-credit score home buyers.
Some key facts about FHA:
Appraisals are mandatory, unlike the potential for an appraisal waiver with conventional. And must be appraised by a FHA approved appraiser. Appraisal costs are slightly higher than conventional and often it will take a few extra days to turnaround an appraisal order on FHA since fewer FHA appraisers service most areas.
FHA rates are substantially less than conventional--and sometimes a FHA loan may be cheaper than a conventional--even with the higher cost of FHA's upfront and monthly mortgage insurance. This is especially the case with a lower credit score home buyer.
FHA is often more lenient than conventional on past derogatory credit like BKs and foreclosures.
FHA also has lower credit score requirements with loan pricing more favorable than conventional on a lower credit score buyer.
FHA will allow higher debt ratios (buyer qualifying income compared to monthly credit and mortgage payments)
FHA has more restrictive maximum loan limits in lower cost Counties than conventional. Maximum loan limit per county can by clicking here
FHA has a no appraisal or income documents needed --streamline refinance loan program for an existing FHA loan refinanced into a new FHA loan. No cash out is available on this loan type.
FHA is typically more expensive for a very high credit score buyer. Conventional would be their first loan of choice.
A FHA appraiser will often be a bit tighter on property condition--and more likely than conventional to list repair and further inspection conditions on a property with deferred maintenance and/or repair conditions.
FHA has some additional rules for manufactured homes including the need for a written engineer's certification of the foundation. And if the manufactured home is in a flood zone FHA financing can be difficult to obtain. Click here for our manufactured home blog posts with more details.
VA zero down payment loan info
A VA loan, in my opinion, is the best home loan available, assuming a borrower is an eligible veteran. VA has rates as low as FHA and almost always much lower than conventional--by anywhere from half a percent to as much as a full percent lower. VA requires no down payment and as of this writing, June 2024, a veteran with full entitlement has no maximum loan amount.
Debt ratio calculations (gross qualifying income monthly (before taxes) compared to monthly credit account payments and the new mortgage) are very lenient and credit score and past derogatory credit waiting periods are more relaxed than other loan programs.
The VA appraisal is ordered by a lender via the VA portal and the VA portal assigns the appraisal report to a local region VA approved appraiser. VA appraisers are typically very well qualified and will complete an appraisal in about 2 weeks. Cost of a VA appraisal differs per VA region as does the allowable time for the appraiser to deliver a completed appraisal report. Once the appraisal report is delivered to a lender, that lender will then do a review of the appraisal prior to issuing a CRV (certificate of reasonable value). Since each lender has the final say, occasionally this process may list additional repair conditions or very rarely, cut the value the appraiser listed in the report. If the appraiser--or lender-- lists any repair items, these repairs will have to be completed prior to closing with typically the appraiser reinspecting the property to confirm this completion via a written report -- for an additional fee.
VA differs from other loan programs with some specific property condition requirements --including in some states like California-- a mandatory structural pest inspection with an updated completion report (commonly called a pest clearance) clearing any listed section 1 items.
VA charges a funding fee which can be financed, or paid by the veteran or seller. A veteran with a disability rating of 10% or more is not required to pay a funding fee, it is waived. The chart below is current as of June 2024.
USDA zero down pros and cons
The USDA Guaranteed loan program has income limits based on household size and location of the property. Currently as of July 2024 the low cost California county/metro area maximum annual income for all household members with 1-4 persons is $114,550. The max annual income with 5-8 persons is $151,250. In high cost counties for example --using the Santa Cruz -Watsonville metro area-- the limits rise to $242,700 for 1-4 persons and $320,350 for 5-8 persons. Income limits can be checked here.
Location of the property is a key element with USDA. The program is designed to promote home ownership in rural areas --however with the expansion of numerous homes into traditional rural areas over the last few decades, it is surprising which "built up" areas are still eligible. Some estimate roughly 97% of the nation's locations are eligible for a USDA loan. The map below shows which areas are eligible--tan areas are not. As you can see, higher population metro areas are typically ineligible, while rural less populated areas are. Exact address can be checked by clicking here.
The USDA program has some unique limitations to go along with it's advantages. With liberal underwriting guidelines very similar to FHA, there are also some things to be aware of. Please keep in mind some lenders may have extra rules called overlays that may be stricter than what USDA will allow.
USDA has a 1% financed guarantee fee and a .35% annual fee collected with each monthly payment. That's less than an FHA loan, and makes the USDA loan a better choice over FHA in many cases.
If the lender's USDA appraised value comes in higher than the sales price, certain buyer's closing costs can be financed into the new loan.
A USDA financing home buyer typically can't own another home at the time of new home purchase closing. There are some scenarios where owning other property may be possible, although very rare. Consult a qualified loan officer to discuss.
If a home buyer has enough liquid funds for a 20% or more down payment they are typically ineligible for a USDA loan
A home buyer's debt ratio is much tighter on USDA than other loan programs with a 35% housing ratio and 45% overall debt ratio typically being the maximum
Some income types do not count towards the max limit such as --a minor in the household wages, foster income, adoption assistance, Snap benefits and a few other types. A fulltime dependent student over 18 living in the home only a small portion is counted.
USDA typically will require a well water quality test
Even though a rural housing program under the US Department of Agriculture, any income producing activities or commercial use structures on the property will typically not be allowed.
Manufactured homes have restrictions. In California only "new" manufactured homes are allowed on a USDA guaranteed home loan. New is defined as any home with a manufacture date of less than one year and not previously occupied. Some other states are in a USDA pilot program that will allow a USDA loan on an existing --more than one year old -manufactured home.
It's very important to keep in mind that some lenders will have overlays, which are tighter rules than what Fannie & Freddie, FHA, VA or USDA has set as the minimum standard for any loan sold to or insured by them. Banks and credit unions for example are notorious for overlays that can make it tougher for a borrower to qualify while mortgage brokers typically do business with wholesale lenders that have little to no overlays.