Just as homes come in different styles and price ranges, so do the ways you can finance them. While it may be easy to tell if you prefer a rancher to a split-level or a Victorian look rather than colonial, figuring out which of the mortgage loan types that work best for you requires a little more research. There are many different mortgage loan types to choose from, and a great lender can walk you through all of your options. But you can start by understanding the 4 most common mortgage loan types.
This is the most commonly used type and usually has the best rates. You’ll typically need at least 10% for a down payment and good credit (usually at least 750). These types of loans can run for 15 or 30 years or “interest only” where you are not paying any principal in your payment. A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the three government-backed mortgage types explained below (FHA, VA and USDA).
The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. Thought of as a first-time home loan program, FHA loans are actually available to all types of borrowers. The government insures the lender against losses that might result from borrower default. This program allows you to make a down payment as low as 3.5% of the purchase price and a much lower credit score minimum of 580. However, a credit score as low as 500 may be accepted with 10 percent down. The downside is that you’ll have to pay for mortgage insurance, which will increase the size of your monthly payments.
Because of the fees associated with FHA loans, you may be better off with a conventional loan, if you can qualify for it. The FHA requires an upfront mortgage insurance premium (MIP) as well as an annual mortgage insurance premium paid monthly. If you put less than 10 percent down, the MIP must be paid until the loan is paid in full or until you refinance into a non-FHA loan. Conventional loans, on the other hand, do not have the upfront fee, and the private mortgage insurance (PMI) required for loans with less than 20 percent down automatically falls off the loan when your loan-to-value reaches 78 percent.
The U.S. Department of Veterans Affairs (VA) offers a zero down-payment loan product to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it’s a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever.
USDA Rural Housing Loan
The USDA Mortgage Loan is another zero down-payment loan product which can only be used in designated areas & towns. However, don’t be fooled by the term “rural”; their definition of rural may be more flexible than you think. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. And this type of mortgage loan is offered to “rural’ residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing. Income must be no higher than 115% of the adjusted area median income [AMI].
Learn more about mortgage loan types by contacting Lyn at 410-876-8770.