For first-time homebuyers, obtaining financing isn’t the aspect of a mortgage they need to contend with. There are also a number of different types of loans available. While the options can be overwhelming, careful research can ensure that you understand each and help you find the one that best suits your situation.
1. VA Loans
VA loans are limited to veterans and members of the military. Often easier to qualify for than a conventional loan, these mortgages are guaranteed by the U.S. Department of Veterans Affairs. It’s important to make the distinction that in spite of being the guarantor, the VA does not actually make the loan.
A VA loan provides those who qualify with favorable terms which often includes not having to make a down payment. These loans are usually limited to the same maximums that a conventional loan uses. Prior to applying for a mortgage, contact the Department of Veterans Affairs and request a certificate of eligibility. Once approved, you can then use this certificate to apply for a loan.
2. Conventional Loans
A conventional loan tends to cost less money over its lifetime than one that is guaranteed by the federal government. The trade-off is that they are often more difficult to qualify for. You usually must have a higher credit score, larger down payment and a lower income-to-debt ratio in order to qualify. It’s also likely that the lending institution that you work with will require you to obtain private mortgage insurance.
Conventional loans can be divided into those that are conforming and non-conforming. Conforming loans meet the guidelines of entities such as Fannie Mae and Freddie Mac in terms of loan limits and other factors. Loans that are higher than these limits also come with interest rates that are higher as well. Non-conforming loans are underwritten by the lending institution which allows them to outline their own guidelines.
3. FHA Loans
As part of the U.S. Department of Housing and Urban Development, the Federal Housing Administration (FHA) offers a range of different mortgage loan programs. These are often designed to help potential homeowners who wouldn’t otherwise be able to buy a home. FHA loans have less restrictive credit requirements and lower upfront costs. In addition, your down payment could be as little as 3.5 percent of the home’s price.
The FHA offers other loan options for homebuyers besides those who are shopping for a first mortgage. A FHA 203K improvement loan, for example, allows you to borrow money for both the purchase of the home and certain repairs and/or renovations. A Home Equity Conversion Mortgage (HECM) is a reverse mortgage program aimed at seniors who are aged 62 or older. You can use it to convert the home’s equity into cash while still retaining the title.
Choosing the right type of loan can save you money both at the time of closing and over the life of the mortgage. Carefully do the math and read the fine print before signing on the dotted line.