Jumbo Loans Vs. FHA Loans
Every year the Federal Housing Finance Agency , also known as their acronym FHFA, sets the maximum conforming loan limits for mortgages that can be bought and insured by both Freddie Mac and Fannie Mae. These limits are capped at $417,000 as of December 2015. This cap applies to single family unit homes throughout most of the United States unless the property is said to be in a high cost housing market, these market areas vary in location but normally share a bolstered conforming loan limit of $625,500.
Any loan which surpasses the Federal Housing Finance Agency’s maximum conforming loan limit is classified as either a non-conforming loan or a jumbo loan. In addition to seeking out these types of loans one can also find conventional mortgages without government backing, or a mortgage backed by the Federal Housing Administration, also known as the FHA.
FHA Loan Advantages
One of the advantages to securing a mortgage loan through the FHA is that the down payment can be substantially lower then would be required on a typical jumbo mortgage loan. Federal Housing Administration backed loans can be as low as 3.0% of the property pricing, where as a jumbo loans downpayment can reach as high as 20% or higher.
There is a downside to the low down payment: You will be required to pay for mortgage insurance if you put down less than 20% of the purchase price. If your FHA loan originated on or after June 3, 2013, you’ll make mortgage insurance premium (MIP) payments for 11 years if your original loan-to-value ratio (LTV) is 90% or less; if your LTV is greater than 90%, you’ll pay MIP for the entire loan term (which can be very costly). The rate you pay depends on the length of the loan and the LTV and – if the loan balance exceeds $625,500 – you’ll owe a higher percentage.
When considering your application most lenders look at your debt to income ratio to decide if you have the income to sustain another debt. Generally, the lower your debt to income score is the better. Whereas a debt to income ration of less then 36% is optimal for a conventional mortgage it is possible to find FHA lenders accepting scores from 43% to 57%.
On top of these advantages the credit requirements for FHA loans tend to be more accepting than those for traditional mortgage loans. In most cases a minimum credit score of 580 is needed to receive maximum financing. Anything lower may still be accepted but most will include a down payment of some sort.