March 22nd, 2022
If you are considering purchasing a home in the United States, you’ll probably be one of the 87% of buyers who choose to finance rather than pay in cash. In this case, it’s a good idea to learn about your financing options. The majority of potential homebuyers will seek a conventional loan, but some choose to pursue a government-backed mortgage. The latter is less accessible to the average homebuyer due to strict guidelines but can be a great option if you are eligible. For example, some guidelines consider the location of your home, or whether you are/were an eligible member of the US military. Read on to learn more about these mortgages and the requirements to qualify.
Depending on which type, a government-backed mortgage could work for borrowers with credit scores as low as 500—or no credit score at all. Compare this to conventional loans which require applicants have a minimum credit score of 620.
Mortgage insurance is optional for conventional loans, depending on the size of your down payment and your loan-to-value ratio (LTV). For most government-backed mortgages, mortgage insurance is mandatory. The insurance stays for the life of the loan unless your initial down payment is more than 10%. In that case, the insurance will fall off after 10 years.
Government-backed mortgages also limit the type of home financed to the owner’s primary residence. This means that borrowers may not finance a second home or an investment property, which is possible through a conventional loan.
The government does not directly fund government-backed mortgages. Instead, a government agency will insure, or guarantee, a loan from an approved private lender. This lessens the risk for the lender in case the borrower defaults on the loan (in other words, they can’t pay their debt). In turn, the lender feels more comfortable decreasing—or even eliminating—the minimum requirements for credit scores and down payments.
There are three different government agencies that insure mortgages: the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), and the Department of Veterans Affairs (VA).
FHA loans are the most accessible of the three options, with no restrictions on the home’s location or buyer’s military background. This type of loan is popular among first-time homebuyers who are still building up their savings and credit scores.
FHA loan limits vary depending on your county. In 2022, the maximum amount is generally $420,860 for single-family homes in low-cost areas and $970,800 in pricier markets.
Your minimum down payment for an FHA loan can be as low as 3.5% if your credit score is at least 580. If your credit score falls between 500 and 579, your down payment must be at least 10% of the home purchase price. Note that while the FHA sets the minimum credit score required for a borrower to be considered, different private lenders may choose to bump up that number.
To be considered for an FHA loan, your debt-to-income (DTI) ratio must be 50% or lower, with a credit score of 580 or higher. If you don’t meet that credit score requirement, your DTI will need to be even lower. In addition, your front-end debt ratio or payment-to-income (PTI) ratio can be as high as 40%. Again, that’s if your credit score is at least 580.
When it comes to your total income, there are no minimum or maximum guidelines for an FHA loan. You will need to have at least two established credit accounts (such as a car loan and a credit card) and verify any cash gifts that will be used toward the down payment. Interestingly, an FHA loan allows up to 100% of the down payment to be attributed to cash gifts. Conventional loans limit this to 20%.
Contrary to what some might think, USDA loans are not limited to those in the agricultural industry. If you would enjoy living in a rural area and are unable to pursue a traditional mortgage, this loan might be for you.
USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program. To figure out if a property is in an eligible rural area, you will need to visit the USDA website and search for your preferred address. Don’t let the term “rural” scare you away! You may not be able to live in a bustling metropolis, but many eligible rural areas are located right outside of city limits.
While it is always beneficial to have an adequate credit score, USDA loans may also approve borrowers with no credit score at all. The borrower will have to demonstrate their credit history through other means, such as consistent utility payments.
If your credit score is above 640, the loan-approval process becomes much easier. You could even end up with a down payment as low as zero.
Adjusted income limits depend on your location. As with most mortgages, you will need to demonstrate dependable income for at least two years. Your PTI ratio must be 29% or less, and your DTI ratio must be 41% or less if your credit score is less than 680.
Those who wish to apply for a loan backed by the VA must meet at least one of the following requirements:
· 90 days of active service during wartime
· 181 days of active service during peacetime
· 6 years of service in the National Guard or Reserves
Even if none of these apply, you could be eligible depending on how you were discharged from service. You may also qualify if you are a spouse of a deceased service member who died during active duty or from a service-related injury.
The VA doesn’t set any minimum credit score or down payment for borrowers. However, private lenders may set their own requirements, with 620 being the typical minimum credit score. This will vary from lender to lender, so it’s good to shop around.
Qualifying veterans or spouses will need to maintain satisfactory residual income every month as required by the VA. This means that after all major monthly expenses have been taken care of, your residual income is able to cover the rest of your household’s needs such as groceries and transportation. Lenders will also examine your debt-to-income ratio. There is no strict number, but you need to demonstrate healthy finances and the ability to pay off a loan.
Not everyone is eligible for a government-backed mortgage, but it’s a great option to consider if you do qualify. Once you’re ready to start your home search, The Sutton Team at Coldwell Banker Chesapeake Real Estate will be there to help every step of the way. Contact us today!
Billy Sutton was great to work with on the purchase of our poultry farm. He provides a wealth of knowledge and we were completely blown away with how resourceful he was. Anytime an issue came up or we were worried about something, he had an answer. He is direct, kept us updated, and made it an enjoyable purchase.
Eddie P.❉April 27th, 2020
Billy contacted me one day and said he had found my way into the poultry business. I had never used a realtor before so this was all new to me. He was very helpful with every question I had. He made sure I was stress free every step of the way, always made sure I had everything done that needed to be so that we were always a step ahead, and always informed me of things to be done that I didn't know about. I would highly recommend using Bill Sutton as your realtor.
Dylan P.❉April 22nd, 2020
A very trustworthy and professional agent. I would definitely recommend him.
Brett D.❉March 9th, 2020
Billy was a fantastic realtor. Being a first time home buyer I was a little stressed and nervous, however, Billy made it stress free and was always wiling to come whenever I needed to show me a house, or answer a phone call to explain something to me. I would definitely recommend Billy to anyone that is buying a house, first time, or fifth time!
Patrick C.❉March 6th, 2020
It was great working with Billy, He is very dedicated to his clients and will go out of his way to satisfy your needs. So if your looking for a hard working realtor Billy is your guy!!!!!
David W.❉November 1st, 2019
If i could give 10 stars I would. Billy was a perfect fit for us. He is a true professional and was very understanding of our concerns. Billy was a great listener. He was with us the entire way. You can call him anytime with question and you will get a very prompt answer. We will definitely use Billy in the future with any real estate needs that might arise. You cannot go wrong with Billy.
Dave K.❉October 26th, 2019
I've heard horror stories over the years in regards to realtors, I guess those people didn't have the right realtor because Billy Sutton did an amazing job, I was looking at houses 2 1/2 hours apart and one way or another he would always show up full of energy and full of knowledge. It's been two years and we still communicate with one another and I recommend him 100%
Jorge V.❉October 9th, 2019
Billy was a pleasure to work with. He's knowledgeable, hard working, and sold my home quickly for a great price. I highly recommend!
Andrew M.❉October 2nd, 2019
Billy is a very knowledgeable real estate agent. If you have a home to sell, give him a call.
Patricia S.❉October 1st, 2019
Billy is incredibly knowledgeable in real estate and talked me through every step of the home buying process for my first home. I went into the process well informed and confident in my decision to buy, and would recommend Billy to anybody looking to purchase a home.
Nick M.❉September 29th, 2019
Lacey is an amazing person she listens to what you want in your dream home and takes the time to find the home that is perfect for you and your family. I totally recommend her to anyone.
Tanya C.❉April 17th, 2020
Lacey was a amazing realtor she worked tirelessly to find us a house that our family would love and she knocked it out of the park. Thank you so much for the hard work you put in.
Larry G.❉March 6th, 2020
I couldn't of asked for a better person helping us with our home! She's highly professional and made sure we found our dream home. Lacey always made time for us as clients and worked so hard to make everything go as smoothly as possible.
Stephanie D.❉March 5th, 2020
Lacey is amazing! She is so patient, understanding, honest and fair! She is everything you would want in a realtor but rarely find. The home buying and selling is a whole process that can be overwhelming and almost impossible if you don't have the right person on your side. She is so caring and pays attention to details you couldn't ask for anyone better to be there with you as you make such an important decision.
Cassi P.❉September 25th, 2019
I have known Lacey for over 15 years. She is one of the most detail oriented and hardworking people I know. I have watched her help people and over again!! I would recommend her to anyone!
Amanda B.❉September 25th, 2019
Whether you’re selling or buying a home for the first time or the tenth time, we’re here to help the process go as smoothly and quickly as possible. Just let us know your real estate goals and we’ll make them happen.
We’d be happy to discuss your home for sale and answer any questions you may have about buying or selling homes in Maryland. Drop us a line or fill out the contact form today – we look forward to getting to know you!