Here is a quick summary of the 3 loans for Kentucky Homebuyers , but we will go into each of them in depth further down.
Types of Kentucky mortgages
Conventional loan – Best for borrowers with a good credit score
Jumbo loan – Best for borrowers with excellent credit looking to buy an expensive home
Government-insured loan – Best for borrowers who have lower credit scores and not much cash for a down payment
Fixed-rate mortgage – Best for borrowers who want the predictability of the same payments throughout the entire loan
Adjustable-rate mortgage – Best for borrowers who do not plan to stay in the home for a long time, and are comfortable with the risk of larger payments down the road
1. Kentucky Conventional Loan
Conventional loans are not backed by the federal government, and they come in two packages: conforming and non-conforming.
Conforming loans – As the name implies, a conforming loan “conforms” to a set of standards put in place by the Federal Housing Finance Agency (FHFA). The standards include a range of factors about your credit and debt, but one of the main pieces is the size of the loan.
Non-conforming loans – These loans do not meet FHFA standards. They might be for larger homes, or they might be offered to borrowers with subpar credit. Some non-conforming loans are designed for those who have gone through major financial catastrophes such as a bankruptcy.
Pros of conventional loans
Can be used for a primary home, second home or investment property
Overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher
Can ask your lender to cancel private mortgage insurance (PMI) once you’ve reached 20 percent equity, or refinance to remove it
Can pay as little as 3 percent down on loans backed by Fannie Mae or Freddie Mac
Sellers can contribute to closing costs
Cons of conventional loans
Minimum FICO score of 620 or higher often required (the same applies for refinancing)
Higher down payment than some government loans
Must have a debt-to-income (DTI) ratio of no more than 43 percent (50 percent in some instances)
Likely need to pay PMI if your down payment is less than 20 percent of the sales price
Significant documentation required to verify income, assets, down payment and employment
Who should get a conventional loan
If you have a strong credit score and can afford to make a sizable down payment, a conventional mortgage is probably your best pick.
The 30-year, fixed-rate conventional mortgage is the most popular choice for homebuyers.
2. Jumbo Loans
Jumbo mortgages are appropriately named: These are loans that fall outside FHFA limits.
Jumbo loans are more common in higher-cost areas such as Los Angeles, San Francisco, New York City and the state of Hawaii.
More money means more risk for the lender, so these generally require more in-depth documentation to qualify.
Pros of jumbo loans
Cons of jumbo loans
Down payment of at least 10 percent to 20 percent needed
A FICO score of 700 or higher typically required
Cannot have a DTI ratio above 45 percent
Must show you have significant assets in cash or savings accounts
Who should get a jumbo loan?
If you’re looking to finance a sum of money larger than the latest conforming loan limits, a jumbo loan is likely your best route.
3. Kentucky Government-Insured Loan
The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners.
Three government agencies back mortgages: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
Kentucky FHA loans – Backed by the FHA, these types of home loans help make homeownership possible for borrowers who don’t have a large down payment saved up or don’t have pristine credit. FHA loans require two mortgage insurance premiums: one is paid upfront, and the other is paid annually for the life of the loan if you put less than 10 percent down, which can increase the overall cost of your mortgage. Lastly, with an FHA loan, the home seller is allowed to contribute to closing costs.
Kentucky USDA loans – USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes. There are extra fees, though, including an upfront fee of 1 percent of the loan amount (which can typically be financed with the loan) and an annual fee.
Kentucky VA loans – VA loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. VA loans do not require a down payment or mortgage insurance, and closing costs are generally capped and may be paid by the seller. A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program’s cost to taxpayers. This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing. Many lenders offer the lowest rates possible on VA loans, and some are willing to accept lower credit scores.
Pros of government-insured loans
Help you finance a home when you don’t qualify for a conventional loan
Credit requirements more relaxed
Don’t need a large down payment
Available to repeat and first-time buyers
No mortgage insurance and no down payment required for VA loans
Cons of government-insured loans
Mandatory mortgage insurance premiums on FHA loans that cannot be canceled unless refinancing into a conventional mortgage
Loan limits on FHA loans are lower than conventional mortgages in most areas, limiting potential inventory to choose from
Borrower must live in the property (although you may be able to finance a multi-unit building and rent out other units)
Could have higher overall borrowing costs
Expect to provide more documentation, depending on the loan type, to prove eligibility
Who should get a government-insured loan?
If you cannot qualify for a conventional loan due to a lower credit score or limited savings for a down payment, Kentucky FHA-backed and USDA-backed loans are a great option.
For military service members, veterans and eligible spouses, VA-backed loans can be a good option — often better than a conventional loan.
Other types of Kentucky home loans
In addition to these common kinds of Kentucky mortgages, there are other types you may find when shopping around for a loan:
Construction loans – If you want to build a home, a construction loan can be a good choice. You can decide whether to get a separate construction loan for the project and then a separate mortgage to pay it off, or wrap the two together (known as a construction-to-permanent loan). You typically need a higher down payment for a construction loan and proof that you can afford it.
Interest-only mortgages – With an interest-only mortgage, the borrower pays only the interest on the loan for a set period of time. After that time is over, usually between five and seven years, your monthly payment increases as you begin paying your principal. With this type of loan, you won’t build equity as quickly, since you’re initially only paying interest. These loans are best for those who know they can sell or refinance, or for those who can reasonably expect to afford the higher monthly payment later.
Piggyback loans – A piggyback loan, also referred to as an 80/10/10 loan, actually involves two loans: one for 80 percent of the home price and another for 10 percent. Then, you make a down payment of 10 percent. These are designed to help the borrower avoid paying for mortgage insurance. While eliminating those PMI payments might sound appealing, keep in mind that piggyback loans require two sets of closing costs and two loans accruing interest. You’ll need to crunch the numbers to find out if you’re really saving enough money to justify this unconventional arrangement.
Balloon mortgages – Another type of home loan you might come across is a balloon mortgage, which requires a large payment at the end of the loan term. Generally, you’ll make payments based on a 30-year term, but only for a short time, such as seven years. At the end of that time, you’ll make a large payment on the outstanding balance, which can be unmanageable if you’re not prepared.
