What type of mortgage is best for you?

When choosing a home loan, there are some things you need to consider like how long you are planning to stay or live in the home, your financial obligations and the savings that you can gain when you compare the monthly costs of homeownership, plus the upfront costs and closing costs.

After taking them into consideration, the most important thing is that you are comfortable with the choice you’re going to make. You should trust your instinct and not be pressured into signing for a loan that will not work for you. Out of all the options which type of mortgage loan should you choose? Here are some pros and cons of each type of mortgage.

Types of Las Vegas Mortgage Loans

Conventional loans

Conventional loans are those that are not guaranteed by the government, as are FHA and VA loans. The primary guidelines for these loans come from Freddie Mac and Fannie Mae, the secondary mortgage market where most loans are sold. This type of loan usually has the most flexibility because of the wider range of loan products offered and the higher loan limits that are allowed.

Conventional loans usually require less paperwork and can be obtained more quickly than government insured ones.

No dollar limits are placed on conventional loans and lenders may not require mortgage insurance, which will reduce monthly payments. A conventional loan also usually offers an option to pay taxes and insurance directly, without adding them to the monthly payment through an escrow account. Conventional loans also can offer such options as interest-only or adjustable interest rates.

But Conventional loans require higher down payments, typically about 20 percent as opposed to as low as 3.5 percent for some FHA loans. That means more money is required upfront. These loans also usually require a higher credit score. Conventional loans also have higher interest rates and lenders financing more than 80 percent of the cost may demand mortgage insurance, although this may be at a lower rate.

Also, Closing costs on a conventional loan usually must be paid at settlement and cannot be rolled into the mortgage as they can with an FHA loan. Such things as loan origination fees are set by the lender, not the government agency, and may be higher. Lenders also may require processing or application fees not applied with government-insured loans.

A few Requirements in determining qualification for Nevada Conventional Loan

• Your monthly housing costs must meet a specified percentage of your gross monthly income (28% ratio).
• FICO credit score must be at least 620 or higher and is usually required to obtain an approval.
• You must have enough income to pay for housing costs as well as any additional monthly debt (43% ratio).

Jumbo loan

A Jumbo Loan exceeds the conventional loan amount.  If you are purchasing a single family home, the conventional loan limit is $417,000; any amount greater than $417,000 will qualify as a Jumbo Loan.

While it may have become cheaper to get a jumbo loan, the requirements to get a jumbo mortgage remain strict. But if you need a jumbo mortgage, don’t get discouraged — unless you have a bad credit of course. Most lenders require a minimum credit score of 720 for jumbo mortgages.

The main advantage of a jumbo loan is being able to borrow the money that you need to purchase a luxurious property. With a jumbo mortgage, you will not need to approach two or more lenders to get the necessary amount to purchase the desired property. Instead, you will have to manage just one mortgage and only one monthly installment.

Jumbo Loan offers a variety of loan programs; allowing to choose the loan terms that best suit your needs and requirements. You could get a fixed rate loan or a mortgage with an adjustable-rate.

As with most mortgages, lenders don’t want borrowers who have too much debt. To help determine whether you can afford the mortgage payments, lenders look at your debt-to-income ratio, or DTI, which compares your monthly debt obligations with your pretax income.

Some lenders will allow DTIs up to 45 percent. Others won’t give you a mortgage if your DTI is higher than 36 percent or 38 percent.

As lenders examine your financial life, they’ll want to see that you have enough money saved to cover your housing expenses in an emergency. Generally, borrowers must have 10 percent of the amount they are borrowing in a savings or brokerage account. Some lenders require more than that.

FHA loans

FHA loans are typically thought of as first time home buyer loans, but actually, they can be used by anyone who meets the guidelines. The borrower must be purchasing the home as an owner occupant and cannot have purchased another home using an FHA loan within the previous year. FHA loans are usually more forgiving of low credit scores and allow higher debt ratios. They also have lower down payment requirements. Because of this, there is an upfront mortgage insurance premium (MIP) which is financed into the loan at the start plus a monthly MIP payment.

One of the big advantages of an FHA loan is that the down payment can be a gift from a relative, allowing a buyer who has little or no down payment to purchase a property. Another advantage is that, in certain circumstances, an FHA buyer may also have a co-borrower that is not a principal occupant of the property being purchased.

One of the disadvantages of an FHA loan that each geographical area has a maximum loan limit that cannot be exceeded. FHA loans are insured by the government; conventional loans aren’t.

With conventional loans that aren’t government-insured, lenders can lose money if the borrower defaults. So they impose stricter requirements on borrowers than FHA lenders.

FHA insurance relieves lenders of that risk. If a borrower defaults, the government will help to pay for the lender’s loss. So FHA lenders can offer loans more freely than conventional lenders.

FHA has a specific limit on the loan amount it will insure. If you’re hoping to buy a high-end home, FHA may not work.

Insurance policies cost money, and FHA insurance is no exception. With an FHA loan, you’ll pay an upfront insurance premium and an annual premium that’s included in your monthly payment.

Also, FHA rates are competitive, but not always the lowest available—especially with the insurance premiums added in. If you have excellent credit and a substantial down payment, you may be able to secure a lower interest rate with a conventional loan.

FHA loans seem to be the preferred choice for millions of homebuyers. Though there is a catch, to be eligible for FHA loans in Las Vegas, Nevada, you must intend to occupy the home. So, rentals or second homes generally don’t qualify. The home must be a 1 to 4-unit property (you may be able to get a loan for a multi-unit property if you intend to live in one of them).

Beyond basic eligibility you’ll need to meet some minimum qualifications:

• You must have a down payment of at least 3.5 percent.
• You must qualify for financing on the balance of the purchase price.
• You must be able to sustain the monthly payments—including the FHA mortgage insurance premium.
• You must have a steady employment history or have worked for the same employer for at least two years.
• You must have established a clean credit history over the previous two years.
• The property must be appraised by an FHA-approved appraiser and meet certain standards.

VA loans

VA loans are made through private lenders and are guaranteed by the Department of Veterans Affairs, so they do not require mortgage insurance. There’s no minimum credit score requirement.

VA loans are available only to veterans who have VA eligibility through service in the US military. In order to obtain a VA loan, the veteran must acquire from the Veteran’s Administration the Certificate of Eligibility or DD-214. VA loans allow the highest debt ratios of all loans, and the Veteran is able to literally get into a home with $1 down because the seller is allowed to pay all of the Veteran’s closing costs. (Usually, the sales price is adjusted to cover the cost of the seller’s contribution.)

VA loans are also the only kind of loan that may be legally “assumed” by another buyer without prior permission from the existing lender by using a contract for sale. Please be careful, this should only be attempted with help from a competent Realtor and advice from an attorney! The terms under which this type of assumption can be done are extremely complicated and can carry risks for both buyer and seller. Until the new buyer either pays off the existing VA loan or qualifies to assume it with the lender, the veteran remains liable for the balance which is owed.

It is generally easier to qualify for a VA loan than conventional loans.

The U.S. Department of Veterans Affairs is not a direct lender. The loan is made through a private lender and partially guaranteed by the VA, as long as guidelines are met.

A VA funding fee of 0 to 3.3% (this fee may be financed) of the loan amount is paid to the VA. When purchasing a home, veterans may borrow up to 100% of the sales price or reasonable value of the home, whichever is less. When refinancing a home, veterans may borrow up to 90% of reasonable value in order to refinance where state law allows.

If the VA shows you have full eligibility, you may be entitled to use of your ZERO money down benefit for the purchase of a home.  As of this date, a Las Vegas VA loan is the only loan out there of its kind that requires ZERO money down up to a $424,100 loan amount.  The guidelines also allow for a family member to gift you funds towards your closing costs or a down payment if you wish to apply one.  The seller may also contribute up to 6% towards your closing costs.  Combine a gift with seller contributions and you could essentially come in with no money out of pocket for a VA home purchase.

A VA loan will not have mortgage insurance which is a very nice feature and can save you money every month when you compare it to an FHA loan. For a conventional loan, you’d have to put 20% down to avoid PMI.

Although the costs of getting a VA loan are generally lower than other types of low down payment mortgages, they still carry a one-time funding fee that varies, depending on the amount of the down payment and the type of veteran.

A borrower in the armed forces getting a VA loan for the first time, with zero down payment, would pay a fee of 2.15 percent of the loan amount. The fee is reduced to 1.25 percent of the loan amount if the borrower makes a 10 percent down payment. Reservists and National Guard members normally pay about a quarter of a percentage point more in fees than active-duty members pay. For veterans, this is a huge benefit. Without needing to put money down, you can certainly buy a home without so much hassle.

Those using the VA loan program for the second time, without a down payment, would pay 3.3 percent of the total loan amount.

You may still be able to qualify for a VA home loan even with a past foreclosure or bankruptcy. You will have the ability to pay off your VA loan without penalty at any point.

Even with the many benefits of VA Loans, there are a few cons, which include:

• VA Appraisers – You don’t get to use any appraiser you want. Instead, it has to be a VA chosen appraiser.
• Lots of Paperwork – VA home loan comes with quite a bit of paperwork.
• VA Funding Fee – When you use the VA loan program, you will have to pay a mandatory VA Funding Fee, which helps to keep the program running.
• Required Termite Report – When using the VA loan program, you will need to get a termite report done and it must be clear.
• Must be Primary Residence – You cannot use a VA loan to buy a second home or an investment property.

Although not everyone is a veteran, the VA home loan program offers some nice options for those who are eligible.

Down Payment Assistance

This program can be considered a true zero down payment program. This is offered by the Nevada Rural Housing Authority (NRHA) – also known as the Home At Last program.  It is money given to you at time of closing on the purchase of your home in the form of a grant.  The funds never have to be repaid under any circumstance. That’s essentially a free cash down payment grant equal to 4% of the loan amount.

This can be applied to both the 3.5% down payment requirement for FHA or closing costs or principal reduction.  This can be used for an FHA Loan, VA Loan or USDA Loan.

Although this may sound too good to be true, here are the guidelines and parameters that must be taken into consideration to find out if you qualify:

• Must purchase the home as your primary residence
• Must complete a homebuyer’s education course
• Available in towns with a population under 150,000 – this includes the townships of:
  • Enterprise
  • Summerlin South
  • Whitney
  • Winchester
• Minimum of 640 Credit Score required for all applicants
• Must meet normal FHA, VA or USDA underwriting requirements
• Household Qualifying Income must fall below $95,500 (meaning everyone going on the loan must make less than $95,500 annually)
• Debt to Income Ratio must be below 45%

On the plus side, it is a common misconception that the home must be in a rural part of the state.  This program works so long as the home you purchase is located in the unincorporated towns of Enterprise, Summerlin South, Whitney or Winchester.  This includes properties in Mountain’s Edge.

First time home buyer loans (state money)

Periodically during each year, the State of Nevada will allocate funds to go towards mortgages for first time or low-income homebuyers. This is called a “state money” loan and typically will run 1/2 to 3/4% lower than the current market rate. There may also be a contribution from the state towards the buyer’s down payment.

State money loans allow a buyer to qualify for a better house than he might otherwise be able to afford. There are certain restrictions which apply to this loan, including maximum annual income and maximum sales price allowed. Once a property has been identified, the buyer must attend classes and wait for approval of his fund allocation. If the buyer ever moves out of the house, it must either be sold or the loan may be assumed by another buyer who must also qualify under the state guidelines. (These properties may not be turned into rental units.) Depending on how long a buyer has occupied the home, he may be required to pay a percentage of the proceeds on the home back to the state when he sells it.

Reverse Mortgages

A reverse mortgage is a useful tool to allow Senior Citizens to live financially independent in their own home.  By using the equity in your home, you can receive a lump sum of funds, payments ongoing for the rest of your life, a line of credit or a combination of any of these.   A borrower can use the equity in their home as a safe and more viable retirement tool.

Some facts about reverse mortgages:

• Offered to seniors 62 or older
• Requires no payment for the rest of the borrower’s life as long as the borrower is living in the home full time
• The amount withdrawn can potentially be done tax free because you are drawing out principal and not earning income
• A reverse mortgage has potentially no effects on taxes or social security
• You will never owe more than what the home is worth and FHA makes up the difference if you ever do. That is what makes a reverse mortgage a non-recourse loan
• The borrower retains title and the right to transfer to their heirs. If the home is ever sold, the mortgage is repaid and any remaining equity goes to you or your heirs
• There is no pre-payment penalty

Recently, reverse mortgages are being offered in a purchase transaction. That means you could use these funds for:

• Paying off an existing mortgage and other debt
• Long term healthcare and prescription drugs
• Property Taxes
• Home repairs and renovations
• Cash reserves for emergencies

Though before getting too excited, here are the Qualifications:

• Borrower must be 62 years or older
• No income or employment requirements
• Credit Score does not matter
• Borrower is not allowed to have any federal debt, home may not be in foreclosure and no tax liens allowable, unlimited mortgage lates
• Borrower must agree to keep the property in good condition, pay property taxes and keep up the home owners insurance
• Requires 3rd party counseling by a HUD approved counselor
• No medical qualifications

No matter how this loan is paid out to you, you typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and generally all of the owners on the title to the home must be 62 years of age or older.

To conclude

Choosing a loan type can be challenging but taking a systematic approach will make it easier. Make time to review your financial situation, including any financial obligations and changes you expect in the future.

A checklist can also be helpful. Take a realistic look at your monthly budget and decide what you can afford to spend on a house payment. Also, assess what funds you have available for a down payment.

Then, most importantly-get the counsel of a competent mortgage professional.

Mortgage program guidelines change regularly, so what you learned even last month may not apply now. Your loan officer will be informed of the latest mortgage developments in your area.