CONVENTIONAL LOAN:
Conventional loan is simply a mortgage that isn’t backed by the U.S. government. If you qualify, you can get this loan from many different types of mortgage lenders, including banks, credit unions and online originators. It’s the most common kind of mortgage.
Conventional loans have some stricter qualifying criteria compared to government-backed mortgages like FHA, VA and USDA loans, including a higher minimum credit score requirement. However, they’re more flexible in other ways, such as allowing for a low 3 percent down payment and larger loan sizes.
Conventional loans come in two main types: fixed-rate or adjustable-rate. With a fixed-rate mortgage, your interest rate never changes; you’ll have the same monthly principal and interest payment for the length of the loan. With an adjustable-rate mortgage, you’ll have a fixed introductory rate, after which the rate changes at preset intervals based on an index rate plus a margin determined by the lender.
Compare current conventional mortgage rates When comparing conventional mortgage rates, it’s good to know what you’re looking at. First, make sure you’re comparing similar loans. Conventional loans can come with different term lengths (like 15 or 30 years) and have different rate behavior (like fixed rates or adjustable rates). Each of these differences will contribute to a different rate.
It’s also important to understand the difference between an interest rate and an annual percentage rate (APR). Interest rates reflect just the interest you’ll be charged for the mortgage, but APR is a more complete picture of the interest rate with the fees you’ll be charged. By comparing APRs, you’ll have a more accurate look at how much a loan will cost you.
Also know that factors like your credit score, income, total debt and loan amount will affect the rate you get. Having a higher credit score, higher income, lower debt and a smaller loan amount will generally qualify you for the best possible rate.
FHA/VA LOAN:
An FHA construction loan is a type of FHA loan that covers the cost of building a home, including the land or lot purchase, building materials and labor. There are two types of FHA construction loans: an FHA construction-to-permanent loan and an FHA 203(k) loan. An FHA construction loan can be rolled into an FHA permanent mortgage.
FHA construction loan is a type of FHA loan used to build a home. It works like a conventional construction loan by providing short-term financing for construction costs, including the land, building materials and labor. Often, borrowers convert these loans to long-term mortgages once the house is built.
Unlike conventional construction loans, however, FHA construction loans are insured by the Federal Housing Administration (FHA). That means if you have a credit score of at least 580, you could make a down payment of as little as 3.5 percent.
DSCR 1-4 UNITS LOAN:
A DSCR loan is used by individual investors to buy residential homes as a real estate investment to generate rental income. Investors turn to DSCR loans for several reasons, often because it’s easier to qualify if you face income limitations.
Lenders always look to vet your income when you borrow money to buy real estate because they want to ensure you’re able to repay the loan. Many individual real estate investors rely on conventional mortgages to buy rental properties—at least to start—and in these cases, lenders will assess your personal income when deciding whether to approve you for a loan. It can be hard to get approved once you have several leveraged properties under your belt, or if you’re self-employed.
DSCR loans make it easier to get approved in these cases. Rather than evaluating your personal income, a lender will look at the income potential for the property you’re buying. Your own personal finances don’t matter as much as the property itself; if it has strong income-generating potential, then you’re more likely to get approved.
Understanding debt service coverage ratio (DSCR)
The acronym DSCR refers to “Debt Service Coverage Ratio,” a measure of the cash-flow potential of the property. It’s calculated like this:
Debt Service Coverage Ratio = Net Operating Income / Monthly Loan Payment (PITI)
In this calculation, “net operating income” refers to how much you’d be earning in rent each month, minus overhead expenses such as holdbacks for repairs and maintenance, property management fees, etc. Your monthly loan payment would be calculated similarly to your mortgage: Principal + Interest + Taxes + Insurance (plus any HOA fees, if applicable).
Most lenders look for a DSCR ratio of 1.2 or more, indicating that your income is higher than your expenses. If your DSCR ratio was 1.0, your income would exactly equal your debt obligations; anything below 1.0, and you wouldn’t be earning enough each month to cover your mortgage payment.
For example, if you earn $2,000 per month after expenses and your mortgage payment is $1,500, your DSCR ratio would equal 1.3. If your mortgage costs $2,100 per month, however, your DSCR ratio would be 0.95; your rental income wouldn’t even cover your mortgage, and it’s unlikely any lender would approve you for a DSCR loan.
DSCR 5-8 UNITS LOAN:
DSCR loans differ from conventional mortgages in the following ways:
DSCR loans are approved based on the cash flow of a rental property, not on the borrower’s personal income. A DSCR loan, which is a type of non-QM loan*, does not require a prospective borrower to furnish tax returns or other financial documents. These are generally required in conventional mortgages.
DSCR loans typically require a higher down payment and generally have higher interest rates.
*Non-QM loan: A non-QM loan or non-qualified mortgage loan is designed to meet the requirements of non-traditional borrowers. Some real estate investors do not qualify for a conventional mortgage because they have inadequate personal income. These investors could purchase a property using funds from a non-QM loan.
How do DSCR loans work?
DSCR loans are based on a property’s rental income. When appraising a DSCR loan, a lender will look closely at how the property’s income compares with the corresponding debt obligation. Specifically, the lender will see if the rental property’s annual net operating income exceeds the total loan payments due in a year.
It is useful to remember that a mortgage lender appraises a DSCR loan application by assessing whether the property’s cash flow is adequate to meet the total mortgage payment that is due annually. A higher rental income implies the property’s cash flow is also higher. Lenders view this positively, increasing the loan applicant’s chances of getting approval. The borrower’s personal income usually does not come into the picture when a loan application is being processed.
FOREIGN LOAN:
A US foreign mortgage loan, also known as a foreign national mortgage, is a type of mortgage offered to individuals who are not U.S. citizens or residents, allowing them to purchase real estate in the United States. These loans are specifically designed to cater to non-residents who might not have a Social Security number, FICO score, or other traditional U.S. credit history requirements.
Here's a more detailed explanation:
Key Characteristics:
Target Audience:
Non-U.S. citizens or residents seeking to purchase property in the U.S. Eligibility:
Lenders may assess creditworthiness based on alternative documentation, such as international credit reports, bank references, or accountant letters, according to Griffin Funding.
No SSN/FICO Required:
Foreign national loans often waive the requirement for a Social Security Number (SSN) and may not require a traditional U.S. FICO score.
Alternative Credit Assessment: Lenders may rely on international credit reports, bank statements, or other financial documentation to assess creditworthiness.
Specialized Loan Programs:
These loans are often offered through specialized loan programs designed for foreign nationals.
Investment Property Focus:
Foreign national loans can be used for purchasing both primary residences and investment properties.
Benefits:
Real Estate Investment: Allows non-residents to invest in U.S. real estate without needing a U.S. citizenship or residency.
Access to Financing:
Provides an alternative to traditional U.S. mortgages for non-residents who may not meet the usual eligibility requirements.
Flexibility:
Some lenders may offer flexible underwriting requirements, making it easier for foreign nationals to qualify for a mortgage.
ITIN LOAN:
ITIN home loans are a specialized form of financial assistance designed specifically for individuals who possess an Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number (SSN). Unlike traditional loans that require an SSN, ITIN loans offer an alternative path to financial support for individuals and their dependents or spouses who do not have an SSN. These loans have distinct eligibility criteria and terms, providing opportunities for various purposes, and are granted based on factors such as creditworthiness and income.
ITIN loans take a little more work than conventional loans, but the rewards are worth it. For immigrants looking to put down roots or long-term permanent residents who want a home of their own, an ITIN loan can open doors that might otherwise be closed.
Specific benefits of ITIN loans include:
Homeownership: A pathway to financing for individuals without a SSN Flexibility: Allows seasonal visitors and others without full residency to buy U.S. property
Credit building: Newcomers can build their U.S. credit as they repay an ITIN loan Reduced risk: By offering access to affordable financing from reputable lenders, ITIN loans help immigrants avoid hard money loans or unsustainable debt At the same time, ITIN loans come with some potential disadvantages:
More paperwork, including an ITIN application and extra proof of identity and residency
Possible higher credit requirements than comparable conventional loans Potentially higher down payments than comparable conventional loans Longer timelines—Some lenders might take longer to process ITIN loans
INTEREST ONLY LOAN:
An interest-only loan, also known as an interest-only mortgage, is a loan where the borrower is only required to pay the interest on the loan for a specific period, typically the initial years of the loan term. During this time, no principal repayment is made, resulting in lower monthly payments. After this period, the loan typically converts to a full amortization schedule, where both interest and principal must be paid, leading to significantly higher monthly payments.
Here's a more detailed explanation:
Reduced Initial Payments:
The primary advantage of an interest-only loan is the lower initial monthly payment compared to a conventional loan, which includes both principal and interest.
No Principal Reduction:
During the interest-only period, the principal loan amount remains unchanged.
Potential for Increased Payments Later:
Once the interest-only period ends, the monthly payments increase substantially as the borrower must begin paying off the principal as well.
Building Equity:
Interest-only loans do not allow borrowers to build equity in the asset being financed during the interest-only period.
Loan Conversion:
At the end of the interest-only term, the loan can either be renegotiated, converted to a full amortization loan, or the principal can be paid off in full.
CONSTRUCTION LOAN:
A construction loan is used to finance the building of commercial or residential real estate. The loan applicant may be a real estate developer or an individual building a custom house. The loan is often short-term and is then replaced by longer-term mortgage financing.
Construction loans are considered relatively risky and usually have higher interest rates than traditional mortgage loans.
Construction loans are usually for only one year. After construction is complete, you can either refinance the construction loan into a permanent home mortgage or get a new loan to pay off the construction loan (sometimes called an “end loan”).
Some borrowers take out a construction loan that is automatically converted to a mortgage loan once the home is completed. This is known as a construction-to-permanent loan.
The borrower might be required to make interest-only payments on a construction loan while the project is underway. Some construction loans may require the balance be paid off entirely by the time the project is complete.
If a construction loan is taken out by someone who wants to build a home, the mortgage lender might pay the funds directly to the contractor rather than to the borrower. The payments may be made in installments as the project completes new stages of development.
Construction loans can also be taken out to finance rehabilitation and restoration projects as well as to build new homes.
BANK STATEMENT LOAN:
A bank statement loan is a type of mortgage that applicants can obtain based on their bank account statements rather than having to provide W-2 forms, pay stubs, and tax returns, as is usually the case. Bank statement loans can be useful for self-employed individuals and other borrowers with inconsistent incomes.
Key Takeaways A bank statement loan allows people to demonstrate their income with their bank account statements rather than W-2 forms, tax returns, or other documents that are usually required.
People who are self-employed, have irregular incomes or lack the customary documents may be good candidates for a bank statement loan.
A bank statement loan is a type of non-qualified mortgage, which can mean paying a higher interest rate and making a larger down payment.
How a Bank Statement Loan Works When you apply for a bank statement loan, the lender will want to examine a year or more of your business or personal bank statements to verify that you have sufficient income to make the necessary payments on a mortgage.
This type of loan can be a good option for borrowers whose income is inconsistent or whose tax returns do not offer the full picture. That can be true for individuals such as small business owners whose incomes may fluctuate and who may claim write-offs that affect how their income is reflected on their tax returns.
Bank statement loans are considered non-qualified mortgages (non-QMs). Unlike qualified mortgages, non-QM loans do not adhere to the Consumer Financial Protection Bureau (CFPB) ability-to-repay rule.
1.This rule is designed to ensure that lenders carefully examine your finances. Non-QM loans are also not backed by government entities, such as Fannie Mae or Freddie Mac.
Non-QM loans can make it easier for people who don't meet traditional underwriting standards to obtain a mortgage and buy a home. However, they can also be riskier for both buyers and lenders.
Pros and Cons of Bank Statement Loans
Before moving forward with a bank statement loan, its worth considering both their pros and cons.
Pros : Easier documentation requirements. Instead of having to demonstrate your income via W-2s and tax returns, you can simply use your bank statements to show your desirability as a loan candidate. Flexibility. You may find that lenders offer more flexibility in the eligibility requirements for a bank statement loan compared to a regular mortgage.
Cons : Higher down payment. With a normal mortgage, you may be able to put down as little as 3% of the home's purchase price as a down payment. With a bank statement loan, the down payment requirement is typically higher, up to 20%. 2 Higher interest rate. Lenders may also charge higher interest rates for bank statement loans compared to other mortgages. Fewer lenders. As with non-QM loans generally, lenders consider bank statement loans riskier and not as many lenders offer them.
JUMBO LOAN:
A jumbo loan, also known as a jumbo mortgage, is a type of home mortgage that exceeds the lending limits set by the Federal Housing Finance Agency (FHFA) for conventional mortgages. Unlike those mortgages, a jumbo loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.
Lenders offer jumbo loans to finance luxury properties and homes in very expensive local real estate markets and have more stringent underwriting requirements for them.
Advantages and Disadvantages of a Jumbo Loan
The primary advantage of a jumbo loan is that it allows borrowers to take out a mortgage that exceeds the conforming loan limits put in place by the FHFA.
The conforming loan limit for single-family homes in 2024 is $766,550 in most of the U.S. but as high as $1,149,825 in some places.
If you have your sights set on a home that costs close to a million dollars or more—and you don't have that much cash sitting in a bank account—you'll probably need a jumbo mortgage.
Higher Loan Limits, Higher Costs However, if you're trying to obtain a jumbo loan, you'll face more exacting credit requirements than homeowners applying for a conventional loan. That's because jumbo mortgages carry more risk for the lender since there is no guarantee by Fannie Mae or Freddie Mac. There's also more risk simply because more money is involved.
Jumbo loans are also more expensive to acquire. For example, closing costs and origination fees are typically calculated on a percentage of the sale, which adds up quickly on higher-priced properties.
Key Takeaways:
A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA) and cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. Borrowers must meet more rigorous credit requirements than those who apply for a conventional loan.
Approval requires a stellar credit score and a very low debt-to-income (DTI) ratio. The average annual percentage rate (APR) for a jumbo mortgage is often on par with conventional mortgages.
USDA LOAN:
A USDA home loan is a mortgage offered by the United States Department of Agriculture to low-income residents. These are usually people who live in rural areas and wouldn’t typically qualify for conventional mortgages. The loans are intended to help people in rural areas buy homes with greater space and modern amenities. Residents may be eligible for two types of loans: the guaranteed USDA loan or the direct USDA loan.
To qualify for either, residents must ensure they fall under the minimum income thresholds listed on the USDA home loan website and live in an eligible rural area. The 2 Types of USDA Home Loans There are two different types of home loans you may qualify for with the USDA: a guaranteed USDA loan and a direct USDA Loan.
Section 502 Guaranteed USDA Loan Through a guaranteed USDA loan, lenders can offer 100% financed loans, also known as no-money-down loans, to eligible low- and moderate-income borrowers. With these loans, borrowers can buy an existing home, build a new one, relocate to a new property, or use the funds for home renovations.
Section 502 Direct USDA Loan A direct USDA loan offers mortgage financing to help low- and very-low-income applicants buy, improve, or repair a rural home. The home must be their primary residence. The Single Family Housing Direct Loan Program also offers financial assistance in the form of a temporary subsidy to help borrowers repay their loans.
1099 or Profit and Loss Statement Loan:
1099 and P&L Only loans are specialized mortgage products designed for self-employed individuals who receive their income through 1099 forms or can demonstrate their earnings through profit and loss statements. Unlike traditional mortgages that require W-2s, tax returns, and pay stubs, these loans allow borrowers to qualify based on their 1099 income or detailed P&L statements, providing a more accurate reflection of their financial health.
Advantages of 1099 and P&L Only Loans :
Simplified Income Verification: One of the primary benefits of these loans is the simplified income verification process. Self-employed borrowers can use their 1099 forms or P&L statements instead of compiling extensive tax documentation, making the application process more straightforward.
Better Representation of Income: For many self-employed individuals, tax returns often underrepresent actual income due to deductions and business expenses. 1099 and P&L Only loans allow borrowers to showcase their true earnings, providing a more accurate picture of their financial capacity.
Increased Accessibility: These loans open up homeownership opportunities for a broader range of self-employed individuals, freelancers, and gig workers who might otherwise struggle to qualify for traditional mortgages.