Before you go shopping for a home, you’ll first need to shop for your financing. And at that time, you might very well be surprised at the number of choices available to you. A loan officer will ask several questions about what you’d like to buy and where as well as general information about your income, employment, funds available and credit. From that, the loan officer will provide your available mortgage options. It might be a bit overwhelming at first but there really are only two types of mortgage loans- conventional and government-backed.
Conventional- Conventional lenders provide mortgage loans underwritten to standards issued by Fannie Mae and Freddie Mac and by far make up the largest categories of loans issued. When a lender approves a conventional loan should the borrowers default on the mortgage, the lender absorbs the loss and forecloses on the home.
Conventional loans offer both fixed and adjustable rate loan programs. Fixed rates are typically available in terms from 10 to 30 years in five year increments. Adjustable rate loan programs are of the hybrid variety where the rate is initially fixed for a predetermined period from three to 10 years. Conventional loans require mortgage insurance if the down payment is less than 20 percent of the sales price, or the loan is structured with a first and a second mortgage to avoid mortgage insurance.
Government-backed- There are three such programs that carry a government guarantee, VA, FHA and USDA mortgages. For those that are VA eligible, this program requires no down payment and certain closing costs are prohibited from the borrowing paying. If you’re looking for a low down payment mortgage with competitive rates and you’re VA eligible, this by far is your best choice. The guarantee is to the lender and should a VA loan go into default and is foreclosed upon- which is rare- the lender is compensated at 25 percent of the loan amount.
FHA loans do require a low down payment. If you want a low down payment loan program and you’re not VA eligible this might be your best choice. FHA loans do have loan limits which can vary by county but there are no income limitations nor does the property have to be located in any particular area. The lender is compensated for all of the loss should foreclosure be necessary.
USDA loans don’t require a down payment but the property must be located in an area designated by the USDA as rural or semi-rural. USDA loans can’t be used in urban or suburban areas and the borrowers’ household income cannot exceed certain limits, or 115 percent of the median income for the area.