Which home loan is right for you? Here's the low-down on different loans
Prospective home buyers have long heard the mortgage industry lingo about different types of home loans: conventional, FHA, USDA and VA. But, what do each of these mean.
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Prospective home buyers have long heard the mortgage industry lingo about different types of home loans: conventional, FHA, USDA and VA. But, what do each of these mean, how do these loan types differ and what are the benefits of one loan type over another?
Here's the low-down on today's four most common types of home loans:
Conventional Home Loans
Brad Benham, vice president and senior mortgage loan officer at Coldwell Banker Howard Perry and Walston, explained conventional mortgages are offered by private lenders such as banks, credit unions or mortgage companies. Conventional mortgages are structured so they meet the lending requirements of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
- Requires a minimum down payment of 3 percent.
- Is available to all homebuyers; not just first-timers.
- Offers fixed or adjustable interest rates.
- Requires a minimum credit score of 620.
If the borrower's annual income falls below a pre-determined threshold ($64,000 in Wake County), then the borrower qualifies for a reduction in their private mortgage insurance expenditure.
FHA Mortgage Loans
An FHA mortgage loan is one that is guaranteed by the Federal Housing Administration, yet offers increased leniency to borrowers with a credit history blemish or two.
- Requires a minimum down payment of 3.5 percent.
- Is available to all homebuyers, including those who have experienced bankruptcy or foreclosure.
- Offers fixed or adjustable interest rates.
"The primary selling point of FHA loans is that they offer lower monthly mortgage payments to clients who have lower credit scores," Benham explained.
USDA Mortgage Loans
A USDA mortgage loan is one that is offered by the Rural Housing Service division of the United States Department of Agriculture. At first glance, it may seem odd that the same folks who govern our nation's food supply would serve up mortgage loans. Yet, it is a strategic move that aims to attract prospective homeowners to rural communities.
"While USDA loans were originally known as 'farmers' loans,' the loans are not limited to farmers," Benham shared. "In fact, lots of areas around the Triangle – including all of Johnston County – qualify for the loans."
- May finance 100 percent of the loan amount at a fixed rate.
- Offers a reduction in PMI.
- Available to all homebuyers, yet qualification is contingent on annual income thresholds as well as the location of the property; click here for details.
VA Mortgage Loans
A VA mortgage loan is one that is guaranteed by the U.S. Department of Veteran's Affairs. As the name implies, VA home loans are available exclusively to active duty U.S. military personnel and veterans.
- May finance 100 percent of the loan amount at a fixed or adjustable rate.
- May finance up to $484,350.
- No monthly mortgage insurance premiums.
- No income or domestic location limitations.
"If you are a veteran and you want a home loan with a low down payment, then a VA loan is your best bet," Benham explained. "VA loans offer huge benefits to our active duty military and veterans."
So, considering all the available choices, how do you decide which home loan product is best for you? Benham advised beginning the home buying process by sitting down with a lender, rather than attempting to "go at it alone" online.
"Lenders help buyers to make informed buying decisions," he said. "Lenders look at your complete financial picture, determine your home buying price range, estimate your monthly mortgage payment and select the best mortgage product for your financial situation. Mortgage lending is not a commodity. There's an art about how you structure a loan."
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