by Brandon Scott
Many people don't purchase a home or start the process because they don't know where to start. And starting the process typically means talking to a lender. I know that it's common for people to think that they should speak to a real estate agent first but, the job of the realtor is to help you find the home. Financing, or ensuring that you have the money to purchase a home, is the job of the lender. So that's the first conversation to really map out your plan for home ownership. Now don't get me wrong, starting with the Realtors a great place to begin to help with direction. But the need to take action is all on you as the person who wants to purchase a home. That means, taking the information provided to you by the real estate agent and acting on it. A lender provides you with either a pre-approval or a pre-qualification that sets the stage for the home search. Knowing what to expect, in my mind, is the biggest concern for buyers. Most people want to know, in advance, what their options are, so here are the standard loan types. Remember that a loan type is different from down payment and closing cost assistance programs. The loan type is the type of financial vehicle the lender will finance your loan through. That vehicles comes with its own set of options or benefits for using it.
Here, I look to summarize the standard loan types and give your more information on what to expect when seeking loan approval.
A conventional mortgage or conventional loan is a home buyer’s loan that is not offered or secured by a government entity.
It is available through or guaranteed by a private lender or the two government-sponsored enterprises—Fannie Mae and Freddie Mac.
Potential borrowers need to complete an official mortgage application, supply required documents, credit history, and current credit score.
Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans.
Additionally, each lender provides different kinds of and types of loan products. A loan product is an instrument used by a bank to package a service. For example, some loan products may come with an interest rate lock or reserved for individuals with a credit scores above a certain number.
Usually, it is here where most people get stuck thinking that this is their only option and their only pathway to obtaining a home. In fact, I plain out feel that many people are misinformed to believe that they need to put down 20% to buy a home, aka use a conventional loan product. And, in many cases, based on your credit score, a conventional loan may require significantly less than 20%. I have seen conventional financing that was even more competitive than an FHA loan.
VA Home Loan
VA helps Service members, Veterans, and their families become homeowners. As part of their mission they provide a home loan guaranty benefit and other housing-related programs to help you obtain, retain, or adapt a home for your own personal occupancy. VA-guaranteed loans are provided by private lenders, such as banks and mortgage companies, and not by VA directly. Through the VA Home Loan Guaranty Program, VA guarantees a portion of your loan against loss and helps lenders provide you with more favorable financing terms. VA home loans can benefit you in many ways:
· VA home loans often have lower interest rates and closing costs than conventional loans
· You may not have to make a down payment and mortgage insurance is not required
· You do not have to pay a penalty if you pay off your VA home loan early
If you are eligible for a VA-guaranteed home loan, you can use the loan to:
· Buy a home or residential condominium
· Build a home
· Simultaneously purchase and improve a home
· Refinance an existing non-VA loan
· Refinance an existing VA loan to reduce the interest rate
· Buy a manufactured home to be permanently affixed to a lot already owned or buy a manufactured home and lot to which the home will be permanently affixed
Obtain energy efficient improvements, such as solar heating
The USDA loan offers mortgage to those individuals that want to buy a home in an eligible rural area. Immediately, you may be think that you have no desire to live in a rural area, but let’s look at the program more closely. These rural loans are available in about 97% of the US’s total land area.
The USDA loan is another guarantee program that incentivizes lenders by mitigating the risk of lending a home to an eligible homebuyer with advantageous rates and terms.
Benefits of this program include, but aren’t limited to:
1. Zero down payment
2. Competitive interest rates
3. Low monthly mortgage insurance, and
4. Flexible credit requirements
The Federal Housing Administration (FHA). FHA offers a popular mortgage loan through approved lenders. Their program emphasizes homeownership for low-to-moderate-income borrowers. Many are able to obtain a home because an FHA loans require a lower minimum down payments and credit scores than many conventional loans.
FHA loan allows to you put down 3.5% of the loan amount versus a conventional loan, which is typically much higher based on your credit and the lenders risk tolerance. For FHA, a credit score of at least 580 is needed to qualify but your lender may have a higher credit score overlay in order to make the loan. This means that you need a least a 580 for an FHA loan, the lender may not approve you for a loan if they require a higher credit score. If your credit score falls between 500 and 579, you can still get an FHA loan provided you can make a 10% down payment and the lender approves financing the loan. It’s important to remember that FHA offers a incentive for a lender to make a loan for a borrower. The government, FHA in this case, does not make the loan.
Many of you may already know this much about FHA. Here’s some additional great information about the program. In addition to traditional mortgage loans, there are four (4) other loan types that are offered by FHA.
Brandon Scott is a licensed real estate agent in Washington, DC, Maryland and Virginia. His license hangs with Coldwell Banker Dupont-Logan, DC. He’s been involved in the mortgage finance industry for the last 16 years in various fields. You can reach him by email at Brandon@bmscott.com. Subscribe to his YouTube Channel at RealTea DMV.