March 12, 2018
Orion offers a wide variety of products to help our brokers and their clients and give them options. One basic segregation in the market today is between conventional loans, normally associated with Freddie Mac and Fannie Mae, and programs offered by the Federal Housing Administration (FHA). It is good to know the differences, and Orion’s AE pride themselves on the ability to explain the differences to both new brokers and remind experienced brokers of the differences.
Conventional programs generally are tailored to borrowers who have well-established credit scores, solid assets, and steady income. As such, these loans have higher barriers to entry than the FHA-backed options. Typically, a borrower needs at least a 620-credit score and ideally a 20% down payment, although you can put down as little as 5%, any down payment under 20% will requires private mortgage insurance, an extra monthly fee meant to mitigate the risk to the lender that a borrower might default on the loan. (PMI ranges from about 0.3% to 1.15% of one’s home loan.)
Most conventional loans also require a maximum 43% debt to income ratio, which compares how much money is owed (on student loans, credit cards, car loans, and the potential home loan) with your client’s income. For instance, if the household take-home income amounts to $5,000 per month, that would mean the borrower should spend no more than $2,150 per month on the mortgage and other debts.
But Orion also offers FHA loans which are great for first-time buyers or people without sterling credit or much money. These loans are insured by this government agency, so that guarantees that lenders won’t lose their money if borrowers default on their mortgage. In short, it allows lenders to take on riskier borrowers.
To qualify for an FHA loan, one needs at least a 3.5% down payment and a credit score of 580. Applicants with lower credit scores (e.g., 500) may not be out of the running entirely but must cough up a larger down payment of at least 10%. These loans also have looser debt-to-income requirements of up to 50%. For example, if a client’s monthly income is $5,000, the payments for the mortgage and other debts should not exceed $2,500.
FHA loans have a few disadvantages. For one, they’re usually capped at $417,000 (in certain high-cost areas where Orion operates, the limit is $625,000). Because the federal government insures these loans, a borrower must pay an upfront mortgage insurance premium (currently, the fee is about 1.75%) and annual mortgage insurance (typically 0.85% of the borrowed loan amount), which remains throughout the life of the loan (or until the client can refinance the loan into a conventional mortgage).
Orion offers a full range of products – and AEs are well-versed in both programs, and their nuances, so be sure to ask us!