Homebuyers looking to get into the mortgage market will have different options than they did just a few years ago. If you’re looking for a home loan, you’ll find that there are four basic types of loans to choose from: Conventional Mortgages, FHA Loans, and USDA, or Rural Development (RD), Loans.
Here’s a look at the differences, advantages and disadvantages between these three types of loan options.
Conventional mortgages are not insured or guaranteed by the federal government. But they do adhere to guidelines set by the government-sponsored enterprises, Fannie Mae and Freddie Mac. Conventional mortgages have a maximum limit at $417 thousand, and may have either a fixed or an adjustable rate.
Fixed-rate conventional mortgages have a set interest rate for the entire length of the mortgage term, which is typically 30, 24, and 15 years. An adjustable-rate mortgage (ARM) has a term of 30 years with a low introductory rate for a fixed period followed by periodic adjustments according to a specific benchmark rate, like a LIBOR rate.
Some benefits of a conventional mortgage for first-time homebuyers are low down payments and the ability to pay toward their principle without penalty.
FHA loans are insured by the Federal Housing Administration (FHA). Basically, the federal government insures loans for FHA-approved lenders, like Simply Home Lending, in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
FHA loans are generally for people who want to put less down on closing. They’re also one of the easiest types of loans to qualify for since you don’t need to have great credit. Another advantage of an FHA loan is that it can be assumable, which means if you want to sell your home, the buyer can take over the existing mortgage as long as the lender approves.
Some disadvantages of an FHA loan are the requirement of a mortgage insurance premium (paid in full upfront or a monthly payment), and that the house meets certain conditions and is appraised by an FHA-approved lender.
USDA / RD Loans
USDA loans are similar to FHA loans in that the USDA insures the lenders against loss. They’re also structured similarly to conventional loans through Fannie Mae and Freddie Mac. The big difference is the down payment requirement.
Unlike conventional loans, USDA mortgages have no down payment requirement, which means a homebuyer can finance a home for 100 percent of its purchase price. The only caveats being that the home must fall within a designated rural area, and the household income isn’t more than 115% of the area’s median income.
Also, USDA home loans do not have a set loan size maximum, so homebuyers can theoretically borrow more money than with other loan options.
VA loans are insured by the Veteran’s Administration (VA). Basically, the federal government insures loans for VA-approved lenders, like Simply Home Lending, in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
VA loans are for veterans only and an proof of eligibility is a requirement. These loans are great and offer low rates with no monthly mortgage insurance. The VA does charge an upfront mortgage insurance fee that is typically rolled into the amount being financed. Just like an FHA or RD loan the credit requirements are a little less restrictive and as an FHA loan is a VA loan is assumable by a buyer of the property (assuming they are VA eligible). VA loans allow cash out refinances to 100% of a home’s value (the only product that currently allows this) and is widely regarded as the best 100% financing available for new home purchases.
At Simply Home Lending, we realize that everyone’s scenario is different, so choosing the right loan isn’t always easy. We do our best to simplify this process.
Our affiliation with 1st Bank has allowed us to use our own appraisal company operated by a third party. The real benefit to this is that we have local appraisers that we know in our selection pool, and are able to choose appraisers who are knowledgeable in their areas.
We also have access to many types of investors, so we can get the best deals on interest rates and closing costs. Where we excel is having the knowledge to place each borrower with their best fit.
Another thing we pride ourselves in is our start-to-finish times. We can close loans extremely fast, but of course, this also depends on the buyer.
We also maintain constant communication with the realtors and borrowers throughout the whole process to keep both sides well informed, and make sure everything’s going smoothly. Our loan officers are always readily available to take calls, respond to text messages and emails at all hours.