So you’re looking to purchase a home but don’t know where to start?
For most buyers, understanding how to get a loan and finding what options are available can be a daunting task. Not all home loans are the same. Knowing what kind of loan is most appropriate for your situation prepares you for talking to lenders and getting the best deal. Mortgage loans are organized into categories based on the size of the loan and whether they are part of a government program. This choice affects: 1) How much you will need for a down payment 2) The total cost of your loan, including interest and mortgage insurance 3) How much you can borrow, and the house price range you can consider. We’ll break down the difference between the major types of loan options available.
Conventional Loan
This is the most common type of loan. Conventional loans are not part of a specific government program. There are two major categories with conventional loans – conforming and non-conforming. Conforming loans have maximum loan amounts that are set by the government. Other rules for conforming loans are set by Fannie Mae and Freddie Mac, companies that provide backing for conforming loans. Non-conforming loans are less standardized. Eligibility, pricing, and features can vary widely by lender, so it’s particularly important to shop around and compare several offers. Conventional loans are available for buyers with minimum 5% down payment however mortgage insurance will be required. Buyers with 20% or more down payment are not required to obtain mortgage insurance and will have the best rate.
FHA
These loans are from private lenders that are regulated and insured by a government agency, the Federal Housing Administration. This government agency does not lend the money directly rather through private lenders. This loan allows for down payment as low as 3.5% and lower credit scores than conventional loans. This loan works well for first time home buyers.
VA
This loan program is made available by the Department of Veteran’s Affairs for eligible veterans, current service members, and surviving spouses. The loans are made by private lenders and guaranteed by the
VA. These loans do not require mortgage insurance and offer low cost and additional protection if you have trouble paying your mortgage. Borrowers eligible for this loan have the benefit of financing 100% of the purchase.
USDA
Similar to FHA and VA loans, the USDA loan is designed for low- and moderate-income borrowers in rural areas. Like VA, this loan program offers zero down payment however will require an upfront fee and mortgage insurance.
Construction or Rehab Loan
This loan program allows you finance the purchase of the property and repairs needed. The lender would obtain an appraisal to determine the value of the existing property and cost to renovate. The lender is involved through the entire process – tracking and verifying the repairs. After each phase of repair is complete, the lender releases funds for the next until completion.
Mortgage Insurance
Mortgage insurance is required for down payments less than 20%. When a borrower puts less than 20% down, there’s more risk to the lender. This insurance protects the lender in case the borrower defaultson the loan. The insurance premium can be an upfront cost or financed with the loan. To learn more about which loan is right for you, contact us to set up a complimentary consultation with one of our trusted lending partners.
