Home Financing Options
Buying a house is a huge step and while it can be an exciting process, if you’re like most of us, you don’t have all the money required to purchase your home upfront. Instead, most people choose to take out some type of loan that allows them to go ahead and have their home when they need it while making a monthly home mortgage payment plus interest on the property while the lender holds the deed to the house. There are numerous types of home loan options available to home buyers, and the one that’s best for you depends upon your individual circumstances as well as your preferences.
There are two primary types of loans available to home buyers when buying a house: conventional loans and government-backed ones. Conventional loans are the ones that are in no way insured or guaranteed by the government. Additionally, conventional loans are also commonly referred to as non-GSE (non-government sponsored entity) loans, which basically means that they aren’t issued by government entities. Conventional loans are the ones you typically take out with places like a bank, credit union or savings and loan.
They usually require you to have relatively good credit history, and previously required a significant down payment on the home you want to purchase. Now, conventional loans offer down payments that compete with governmental loans at 3% down, 10% down, 15% down and the traditional 20% down. The biggest benefit of a conventional loan vs. a government loan is being able to get rid of PMI (private mortgage insurance) when you put a down payment under 20%, while with an FHA loan, you’ll have it for the life of the loan unless you refinance.
Unlike conventional loans, government loans come from the government, as their name implies. Not everyone qualifies for a government loan, but it’s certainly worth looking into whether you qualify or not since there are definitely certain perks to be had with government loans that you can’t get with conventional ones. There are three primary types of government loans.
FHA loans are ones that are issued by the Federal Housing Administration, hence “FHA.” These types of loans are among the most popular types for first-time home buyers since they are specifically designed to assist home buyers who have less than perfect credit and are unable to come up with a significant amount of money to put down as a down payment on their home purchase. FHA loans also come with relatively low interest rates, as low 3.5% for first-time home buyers who have credit scores of 580 or higher. While FHA loans do tend to offer lower interest rates, the disadvantage to them is that you will also be required to pay for mortgage insurance, which will increase the amount of your monthly home mortgage payments. Depending upon the price of the home that you want to buy, your income, the amount you can afford to offer up as a down payment and whether you want a fixed-rate or adjustable-rate mortgage, it might be more financially beneficial for you to go with a conventional loan in the long run.
VA loans are ones that are issued by the Department of Veterans Affairs, and they are exclusively issued to veterans of the United States military. Additionally, you must not have been discharged dishonorably in order to be eligible, and the home must be intended for your own personal usage. The way VA loans work is by guaranteeing a portion of the home mortgage to be paid each month in the event that the recipient of the loan cannot meet his or her monthly mortgage payment.
You can apply for a VA loan through a bank or other type of financial institution that is qualified to extend financing through a VA loan program. The primary advantage of a VA loan is that no down payment is required for them. However, because they are issued by private lenders, you generally must meet the same eligibility requirements as those to get a conventional loan, and you can only own one home at a time to have it backed by the VA.
Additionally, there is no PMI on this loan and the credit score requirement is low at only 620. Finally, there are limited closing costs which allow the buyer to have even less funds to bring to the closing table. This is a great loan option for those that have served in the military.
For those people who want to do a bit of renovation to their homes, there are 203K loans. These loans basically combine a FHA loan with a home improvement loan. These types of loans are most ideal for people who want to purchase a fixer-upper and have the funds to fix up their homes upfront when they’re buying a house. The terms and eligibility requirements are basically the same as those for FHA loans since 203K loans are also issued by the Federal Housing Authority, and they also come with the same disadvantage of having to pay for monthly private mortgage insurance if you put less than 20 percent down on the cost of your home purchase.
As you can see, home buyers have various options to choose from when faced with deciding which type of home mortgage to take out when buying a house. The best way to choose which loan is best for you is to first determine which loans you quality for, and then evaluate your financial circumstances as well as how soon you wish to have your home paid off.