If you are a first-time buyer, consider an FHA mortgage, said Frank May, senior loan consultant with Green Valley Mortgage in Bloomingdale.
May said such loans are good for borrowers in the 620 to 680 credit score range, which would require higher fees or interest rates with conventional mortgages. Some FHA borrowers can have credit scores as low as the high 500s.
The very best credit scores are above 800, May said.
FHA (or VA loans if you are a veteran) have advantages:
• A borrower can pay as little as 3 percent for a down payment, which can come from either the buyer or as a gift from a relative. Closing costs are additional but can be paid by the seller.
• Generally, FHA borrowers should have housing expenses at or less than 29 percent of gross income and minimum payments for all debt at 41 percent. However, these numbers are flexible, and the FHA Web site, www.fha.gov, urges home buyers to consult with a mortgage professional.
However, such loans also have drawbacks:
• A mortgage must be $275,200 or lower. The median price for homes in the Chicago area in November was $247,000, according to the Illinois Association of Realtors.
There is talk of Congress raising the limit and lowering the cash requirement.
• If you have a down payment in the 20 percent range, you might want to get a conventional mortgage because mortgage insurance is still required with FHA loans.
Freddie and Fannie
So-called conventional loans sold to Freddie Mac and Fannie Mae are the backbone of American mortgages.
With such a loan, a mortgage cannot be more than $417,000.
If your credit score is good -- but between 620 and 680 -- you will pay a slightly higher interest rate and closing costs will be increased by hundreds or a few thousand dollars, May said.
A 30 percent down payment would negate less-than-perfect credit.
Borrowers also pay more if the down payment is less than 20 percent, but it can be as low as 5 percent, May said.
A conventional borrower should keep housing expenses within 33 percent of gross income and all debt within 38 percent. These guidelines are flexible depending on circumstances like great credit, assets, family size and expenses, or expectations of increased income.
