There are a lot of different types of loans that you can use in order to purchase a home – let’s look at the basic 3 options and the SIMPLE differences.
1. Conventional – this can be a cost-efficient option – depending on your credit worthiness and financial situation. Typically requires a minimum credit score of 620 (the higher the credit score usually relates to a lower interest rate), a debt to income ratio can be no more than 43%, your down payment can be as little as 3% but you should be aware that anything less than a 20% down payment will require a PMI (Private Mortgage Insurance) which protects the lender in case of failure to make the monthly payments. Once you reach the 78% of the original home value, it can be cancelled. This type of a loan is typically the one that is considered “the most solid” of loans – it’s not backed by the government so there are more stringent qualifications. The more down payment you have, the better it looks to a seller.
2. FHA – Federal Housing Authority – this type of loan is a government backed loan – usually requires a minimum credit score of 580 – (a 500 score is a potential but then you need 10% down payment), typically requires at least 3.5% down payment and allows up to 50% of a debt to income ratio. With an FHA loan, you will have MIP (mortgage insurance premium – similar to PMI in conventional loans) however unlike PMI, MIP cannot be cancelled…you are paying the extra amount per month until you can refinance to a conventional mortgage.
3. DVA – Department of Veterans Affairs – this type of loan is also a government backed loan available to our veterans – generally requires no money down, the credit score should be at least a 640, the interest rates are typically lower than conventional (come on, these are the people that have served our country – they deserve as many “perks” as they possibly can get!!!) and it can only be used to purchase a primary residence – no vacation homes for example. The challenge with this loan is that with having $0 for a down payment, some sellers can get nervous as to the “reliability” of the buyer. There is also a VA funding fee of 1.4%-3.6% of the loan amount that can be charged to the seller – the buyer can choose to “add” this amount to the offer to offset the cost to the seller, if the funds are available.
Alrighty – that’s the nuts and bolts of the types of loans – of course there are multiple programs out there that are available but usually they will fall within one of these 3 categories…hopefully that all made sense and you feel more knowledgeable about the different types of loans out there!
