Unless you’re planning to pay all cash, if you’re shopping for a home then it means you’re also shopping for a mortgage. Depending on your personal situation, some mortgages could be a better fit for you than others. Knowing which loan is the best choice for you can save you money down the line, so it’s important to be knowledgeable about what’s available. With that in mind, let’s take a look at four of the most common types of home loans.
As the name gives away, a conventional loan is the most common type of home loan. As defined by the Lending Tree, a conventional loan is “a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.” Generally, a conventional loan is going to offer the best rates, terms and lowest monthly payments. This is because this type of mortgage is not part of a government program, which means fewer requirements and looser regulations. However, it is important to note that since this means a great risk for the lender, the buyer must meet the following requirements: good credit, steady income and the ability to make a solid down payment.
We recommend this option for buyers who have enough savings to make a sizeable down payment and qualify for the other requirements laid out. The decision is not done at this point though! Once you ensure that a conventional loan is the best choice for your situation, it is important to research lender options and try to locate the best rates and fees.
As defined by Investopedia, an FHA loan is “a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment.”
FHA loans are available for those with a credit score as low as 500, but those will a score between 500 and 579 will be required to put 10% down. However, those with a credit score above 580 are allowed to borrow up to 96.5% of the value of the home and the 3.5% down payment requirement can come from a gift or a grant. Obviously, this option is popular with first-time buyers or any buyers that are unable to make a hefty down payment.
Quick history: FHA loans were introduced after the Great Depression when defaults and foreclosures were sky-rocketing. To help address this crisis, the government introduced federally insured loans to help reduce lender risk and to revitalize the housing market.
The FHA does not directly lend the borrower the money, instead the borrower pays a monthly or annual mortgage insurance premium to the FHA to insure the loan which is actually given to them by a standard lender. If the borrower were to default, the FHA would step in to cover the payments which puts the lender at lower risk.
The bottom line: Lenders are more likely to issue loans that put them at risk if said loans are insured by the government – making an FHA Loan a great option for those with lower credit or less savings.
Finally, Veterans Affairs (VA) loans are available for those who have served in the military. Borrowers can secure these loans with no down payment and (unlike FHA and USDA loans) no mortgage insurance is required. There are strict guidelines about the type of home that can be purchased, and it must be your primary residence.
In order to quality for a VA loan, veterans must meet minimum requirements for length of service in order to qualify for a VA loan. Spouses of those who died during service may also qualify. A certificate of eligibility will be required, although in some cases the lender can secure it for you.
As you can see, much more goes into home-buying than simply locating your dream home. The Weber Accetta Group would love to be a part of your home-buying journey – from securing your loan to handing over the keys, we are here to make this process as seamless as possible!
As always, please contact us with any questions or concerns – we are here for you!