Continuing down the “First Time Home Buyer” series checklist it is now time to apply for a mortgage. If you missed our last topic detailing the mortgage timeline you can find it right right here.
What many people do not know is that there are several mortgage options and every new homebuyer’s situation determines what option is best for them. Below we will present an overview of each option and follow up with a separate post for each tackling all the tricky details.
This program is generally for borrowers with greater than 700 credit scores. It requires at least a 3% down payment and, in some cases; it cannot be obtained without a 10% down payment if purchasing a second/vacation home. It carries a monthly mortgage insurance premium (PMI) if there is not 20% down, but it has no funding fee, like FHA and VA, in the closing costs to insure the loan. Although mostly borrowers with high credit scores use the program, in some cases lenders will consider scores as low as 620. Fixed and adjustable rates are available. Down payments can be used in the form of a gift.
Lastly, there is a giant myth regarding conventional loans and bankruptcy, and amount of time needed to wait after a bankruptcy. Most people believe the waiting period is 7 years from a foreclosure but it is actually just 4 years from the date of bankruptcy discharge.
This program allows you to purchase with just a 3.5% down payment. Unlike the rural development program (more on that later), it doesn’t have a maximum income level to qualify and it’s a bit more liberal on the debt-to-income ratios and credit history. This program is a great choice for borrowers that have past credit blemishes and are challenged to come up with a more substantial down payment. Gift Funds are allowed, non-owner occupying co-borrowers are also allowed, and up to 6% of the selling price can be negotiated for the use of seller contributions or concessions.
This program is exclusively for Veterans and is extremely similar to the FHA program except that it doesn’t require a down payment. The seller may pay closing Costs and Prepaid items and Gift Funds are allowed. One of the many benefits of VA financing is there will be no monthly PMI (Private Mortgage Insurance). Also, if the buyer has a 100% service related disability they do not have to pay property taxes in the state of Michigan.
Some other interesting facts regarding the VA loan:
- The average VA borrower has just over a 700 median credit score. The VA default rate is around 1%. Conventional is 7%.
- The veteran is not allowed to pay certain fees if there is an origination cost. This can save the Veteran around $400.
USDA Rural Development:
This program is designed to help middle-income borrowers to purchase rural housing. Many Michigan homes qualify for this program, including those in the Northwestern Oakland County and all of Livingston County. Unlike other mortgage programs, this program allows 100% financing up to the appraised value with monthly mortgage insurance (PMI). Also unlike other mortgage programs, it allows you to roll your closing costs and prepaid expenses into the mortgage. With competitive interest rates, and a zero down payment, this program is extremely popular for those who do not have a lot of a reserves but who have a good work history and strong credit.
These are the four main options! There is a few other mortgage options that will fall into one of these four categories that we will cover when we tackle each option specifically.
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