So, you’re thinking of getting a home loan to help you land a house. You likely qualify for at least one of the available options, depending on what you can afford, so be certain you make the wisest choice for your situation. Here are the four main types of home loans as well as the upsides and drawbacks for each.
The Issue
The first thing you should do is figure out the amount of house you can afford. A mortgage calculator can also come in handy in terms of what kind of payment is doable. After all, pre-approval of a loan doesn’t necessarily equate to affordability. Once you settle these issues, you can start to explore your options.
Conventional Loans
The most common type of mortgage loan, a conventional mortgage loan typically calls for good credit – the better it is, the lower your interest rate – as well as 10 percent down. The down payment required is often stated as 20 percent, which is untrue.
Now, if you can put down 20 percent, you’ll pay down your principal quicker, and you needn’t shell out extra for private mortgage insurance.
Loan terms – the length of time available to clear your debt – are 10, 15, 20, or 30 years, with 30 years being the most common. In general, longer terms mean higher interest rates.
Shorter terms mean higher payments, but over time, will save you money in interest. Note that just because you choose a 30-year mortgage doesn’t mean you can’t throw extra money at it when you can. And later, you can go through Achieve loans to garner a home equity loan.
A possible drawback to a conventional loan is that you need a credit score of at least 620.
By the way, there are two types of conventional loans: adjustable-rate mortgages, which carry a rate that will change, up or down; and a fixed-rate mortgage, which carries a rate that will stay the same. While fixed-rate is most popular, an ARM might be your best option – if you don’t plan to be in your home a long time.
Federal Housing Administration Loans
First-time home buyers usually go with an FHA loan because the credit score isn’t as crucial, and the required down payment is lower.
So, let’s break it down: You’ll just need a credit score of at least 580. And even those with a lower score might be eligible if they can put 10 percent down. Otherwise, you just need a down payment of 3.5 percent.
Drawbacks include the upfront funding fee – 2.25 percent of the entire financed amount – which is paid at closing. Also, for the life of the loan, Mortgage Insurance Premiums are required. Right now, the MIP rate is 0.85 percent, which will be rolled into your monthly payment.
So, because of the higher rate and MIP costs, you’ll pay more over time for this kind of loan.
Veterans Affairs Loans
If you’re an active or former military member, or a surviving spouse of a member who has not remarried, this kind of home loan may be for you. If the home’s sale price is not more than the appraised value, you need no down payment. Also, there are no PMI premiums, closing costs are limited, and rates are comparably low.
Further, there are no penalties for early payoff, you can use a VA for a future home purchase, and the VA has resources to help you if you have trouble making payments.
However, you will be charged a funding fee for operating costs, and because the VA will just guarantee 25 percent of the loan, the lender may have additional requirements.
U.S. Department of Agriculture Loans
In case you were wondering, such loans are not just for farmers. Rather, they’re designed to promote rural development. As such, these loans are for those in designated rural areas.
You don’t need a down payment and interest rates are competitive. There’s no minimum credit score, although most lenders want to see 640 at least.
As far as drawbacks, you’ll have to pay an Upfront Funding Fee at the closing of 1 percent of the entire finance amount. There’s also an annual fee – 0.35 percent of the loan.
This information on the four main types of home loans will help you understand what you may be qualified for, and the kind of loan you can afford.
