When you take out financing to buy a home, it’s a purchase money mortgage. The bank provides you with some (or all in some cases) of the money to buy a home. If you are making a down payment, you combine the proceeds of the purchase money mortgage with your down payment to pay the seller. In exchange for the funds, the bank puts a lien on the property. If you were to sell the property, the lender would be the first to receive proceeds before you receive any money in hand.
You can find purchase money mortgages at a variety of places. You can apply for a loan with your local bank. You can also apply for a mortgage from an online lender, credit union, or mortgage broker. It works to your advantage to shop around to find the best deal on your mortgage.
There are several types of purchase money loans. Keep reading to find out which type may suit you.
Conventional Purchase Money Mortgage
The conventional purchase money mortgage is the most common loan that many people know about. With this financing, you’ll typically need a down payment between 5% and 20% of the purchase price of the home.
Conventional home loans have the strictest guidelines out of any of the home loan programs available. Typically, you need a credit score of at least 680, a housing ratio of 28%, and a total debt ratio no higher than 36%. You should be able to portray stable income and employment over the last few years and be able to verify your assets, especially those used for the down payment and/or closing costs.
You can find conventional loans at a large variety of lenders, including the types we spoke about earlier. No two lenders will have the same requirements or charge the same rate/fees, so make sure to shop around to find the best deal.
FHA Purchase Money Mortgage
Many people know the FHA purchase money mortgage as the first-time homebuyer’s loan. While it does have that reputation, it’s not only for first-time homebuyers. The FHA loan is for any borrower that doesn’t have the 680 credit score that conventional loans require and/or doesn’t have at least 5% to put down on the home.
FHA loans have more flexible guidelines and only require 3.5% down on the home. Of that 3.5% down payment, 100% of it can be a gift as long as the borrower has a credit score of at least 580. This gives you even a little more leeway when securing financing to buy a home.
In addition to the 580 credit score requirement, the FHA requires a maximum 31% housing ratio, 41% total debt ratio, stable income/employment, and proof that you will live in the home as your primary residence. The FHA doesn’t allow the use of their program for second homes, vacation homes, or investment properties. If you will make a down payment from your own funds, you must also prove that you have the assets available. Even if you receive gift funds, you’ll need to provide proof of the donor’s funds along with providing a gift letter that states the intention of the gifted money.
VA Purchase Money Mortgage
If you are a veteran with an honorable discharge and enough time served in the military, you may be eligible for the VA mortgage. In order to be eligible, you must serve at least:
- 90 days during wartime in the regular military
- 181 days during peacetime in the regular military
- 6 years in the National Guard or Reserves
If you are eligible for the program, the VA will guaranty a loan in your name. They will provide the guarantee to the lender in the amount of 25% of the maximum conforming loan limit. Today, the maximum conforming loan limit is $453,100, so the VA will guarantee $113,275.
In order to qualify (which is different than being eligible), you must have a 620 credit score (for most lenders), a maximum 43% total debt ratio, prove that you have enough disposable income each month to meet the VA’s requirements for your area, and prove that you will live in the home as your primary residence.
One difference with the VA loan is the lack of down payment that is necessary to buy the home. The VA provides 100% financing for eligible veterans. This means you may get the home with no money down, but you may be liable for the closing costs on the loan unless you work out other arrangements. Since there isn’t a down payment required, you may not have to verify your assets, unless you are covering your own closing costs, then you will have to verify enough assets to cover those costs.
USDA Purchase Mortgage
Homebuyers that have low to moderate income compared to their area and that don’t mind living in a rural area, may take advantage of the USDA purchase program. This program also provides 100% financing, but only certain borrowers are eligible.
In order to be eligible for the USDA program, your total household income cannot be more than 115% of the average income for the area. You can figure out your eligibility here. You must also purchase a rural property, which you can check out the USDA boundaries for here.
If you can meet both eligibility requirements from above, you will need to qualify for the mortgage. This means you’ll need a 640 minimum credit score, maximum 29% housing ratio, and 41% total debt ratio. You’ll also need to prove that you cannot secure any other type of financing from above and that you’ll live in the home as your primary residence. USDA loans are only for owner-occupied properties and to help those that otherwise wouldn’t be able to buy a home.
Other Types of Purchase Money Loans
If you don’t fit the mold for any of the above loans, you can also try a subprime loan. Don’t let this loan scare you – it just means that the lender doesn’t follow any of the standard mortgage regulations that other entities follow.
Instead, the banks offering these loans keep the mortgage on their own books – they don’t sell it to investors. This gives the bank the chance to make their own rules, which may mean more flexible guidelines for self-employed borrowers or other borrowers with unique situations.
A purchase money mortgage is the first mortgage you’ll ever receive. Once you own the home, you may refinance the loan or get a home equity loan, which are different types of loans. The purchase money loan is the loan that gives you the money to become a homeowner.Click to See the Latest Mortgage Rates»