How To Choose A Home Loan
It is only natural for you to be perplexed about choosing the most appropriate home loan, especially with so many options in mortgage loans. You may be tempted to just walk in to your local bank or apply for something online. It is perfectly understandable to feel this way. However, with a little knowledge and patience you can find a loan that will save you tens of thousands of dollars and increase your attractiveness of your offer. The following article will help you understand the different mortgage loan options, so that you can decide what type of home mortgage loan will be most financially viable for you. This is meant to be a general overview and is not a total picture of all the loan options out there for you to take advantage, nor replace the advice from a professional loan officer.
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Home mortgage loans options include conventional loans, FHA, USDA and VA loans. Read on to learn about the advantages and disadvantages of each type, which will help you make the right choice for achieving home-ownership goals.
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FHA
Home loans insured by the Federal Housing Administration (FHA) may be the right choice if you are looking for a more relaxed set of qualifications or smaller down payment options. This type of loan is widely used with first time home buyers, those with low to moderate income or challenging credit profiles.
Down Payment Is Relatively Smaller – While standard conventional loans may require a down payment anywhere between 5% and 20%, this type of loan requires a down payment of just 3.5%.
Credit Requirements Are Less Challenging – In case your credit history is nil or very little, you can rest assured that the approval requirements for FHA loans are not as stringent as the conventional ones. Presently, a credit score of 500 is sufficient to be qualified for this loan option. And if your score is more than 580, you can avail for maximum financing and minimal down payment.
Profitable Interest Rates – For those of you whose credit history is challenging, applying for a loan in this category can be profitable. This is because the FHA interest rates remain the same irrespective of what the credit score of a home buyer is which is usually lower than conventional loans.
Fixed or Adjustable Options – You have two basic options when using an FHA loan on a purchase. These options will depend on the length of time you intend on keeping this home. Fixed rates will lock you into
a rate for the duration of the loan and can be a great choice during low interest rates. This is typically a longer-term play. Adjustable rates can start off lower than fixed but adjust with market conditions over time. Typically, those who look at this option plan on selling or refinancing in the short term. (5-7 years)
Must have Mortgage Insurance – The main downside of an FHA mortgage is that it may cost borrowers more in total monthly housing expense as compared to a conventional loan because it requires the borrower to pay an up-front and ongoing annual FHA Mortgage Insurance Premium (MIP). This insurance is a requirement that covers the loan in case of default.
The most common FHA mortgage program is available to all qualified borrowers but there are other FHA programs specifically for Native Americans, disaster victims, law enforcement officers, teachers and firefighters.
Conventional Loans
A conventional mortgage refers to any loan that is not insured or guaranteed by the federal government such as FHA, VA or USDA loans.
This type of loan is a good choice for those with superior credit and larger down payments than FHA requirements. If you are planning on staying in your home more than 7 years and interests rates are on the rise, this is where you want to be.
Quicker Approval- Since lesser paperwork is involved in this loan type as compared to government insured loans, you can obtain the loan more quickly. There is no need for review by any government agency. Flexible Mortgage Insurance options – While you will have mortgage insurance when using an FHA loan option, conventional loans are more flexible. This type of Private Mortgage Insurance (PMI) will be determined according to your down payment.
Limits On Loan Amount-There is a limit for a standard conforming conventional loan. On a 1 unit home, it is a loan amount of $667,000. Anything over that moves you into a Jumbo loan category which is meant for these larger loans.
Down Payment Is Relatively Higher – Unlike the FHA loans, the typical down payment in conventional loans can reach as high as 20%. This implies that you have to pay a lot more amount upfront. 20% will allow you to skip getting PMI but is not necessary as there are 5-10% options. Suggestion- we also do have some special programs that offer 3% down such as home ready and state bond.
Interest rates are tied into credit score – Unlike FHA loans, interest rates can fluctuate with your credit score and vary between lenders. Usually if you have a less desirable credit score you would look to FHA options.
Fewer Penalties and Fees Loan type options – You have three main options with conventional loans : Fixed, adjustable or jumbo loans (larger loan amounts).
VA
These are loans backed by the US Department of Veterans Affairs (VA) and are a great option for active, retired and spouses of our military heroes. In order to be eligible for a VA loan, you must first obtain a valid Certificate of Eligibility (COE) from the VA.
No Down-payment Requirement – Your loan can be 100% financed and all the associated fees wrapped into the loan.
Government Guarantee – At least a quarter of the overall loan money is guaranteed by the government. That is the reason why there is no need for down payment, or purchase of mortgage insurance, unlike the other loan types.
Limited Closing Costs – There is limitation on closing costs in this loan type, and lenders fees are limited to a meager 1% of the overall loan amount. There are also restrictions on what fee type the buyer will be responsible for.
Greater Loan Amount- The maximum amount of your loan is generally more than what you get in FHA loans. In specific high-priced markets, you have the option of borrowing up to an impressive $1,000,000.
Seller Costs – The home seller will be on the hook for certain expenses that the buyer is not allowed to pay. This can affect the overall excepted price and negotiated offer. In a hot market, seller may not be willing to take this expense on without looking to fold it into purchase price.
Longer Duration- Closing a VA loan tend to take longer to process due to the volume of requirements and paperwork. Also, a VA approved property inspector will need to approve the home prior to the approval that can either delay or cancel the sale eventually.
Loan type options – VA loans can be structured as fixed rate or an adjustable arm.
USDA
USDA loans are government insured loans for purchasing rural property outside of major metropolitan areas. A common misconception is that these loans are only for farm lands. This is not true and can benefit anyone living outside the major metropolitan areas.
No Down Payment – The United States Department of Agriculture or USDA rural home loan does not require any down payment.
Lower Interest Rate – In comparison to conventional loans, the interest rates are typically lower in USDA rural home loans.
Allows Closing Costs To Roll In – This is the only loan type where the closing costs are allowed to roll into the overall loan amount; however the estimated value of the property needs to be more than your loan amount.
Added monthly costs – You have to pay Mortgage Insurance Premium on the life of the loan as you will not have a down payment.
Upfront Payment – A guarantee fee is required to be paid upfront
Applicable In Certain Rural Areas – You need to check with the USDA official website if you stand eligible for the this type of loan as it is specific to certain rural areas only.
Longer Time for Approval – It generally takes one to three weeks more than other loan types, to close because it gets underwritten two times- the first time by lender, and the second time at USDA (directly). The guidelines for income limitations, credit and ratios are extremely strict in case of USDA rural home loan.
Loan type options – Available in 30 year fixed only.