Buying a home can be an interesting mix of stressful tasks and fun ones. Touring different homes, imagining yourself in a new place, and daydreaming about your new larger backyard or kitchen can be so fun! But applying for a home loan, packing up your stuff, and waiting to hear if your offer was accepted can be difficult and stressful. Home loan products may seem mysterious with all their abbreviations, but a good mortgage lender will help guide you through the process. Here’s a good primer on the four most common home loans.
A conventional home loan is the most common loan for folks who have purchased real estate before. You will need to put up a heftier down payment (usually 10-20%), but in exchange, you get a better interest rate. The federal government does not back convential mortgages, so you will want to shop around for the best deal out there.
Fixed Rate vs. ARM
You will encounter both fixed rate and adjustable rate mortgages (ARM). The adjustable rate mortgage will have a lower interest rate to begin with, but it will fluctuate with the market, which may mean unpredictable payments in the future. A fixed rate will start slightly higher, but will never change.
First time home buyers often use an FHA home loan. They require a lower downpayment (3-10%), and the credit requirements are slightly less stringent than conventional. On the other hand, they also typically have a higher interest rate than a conventional loan. The Federal Housing Administration insures FHA loans.
If your downpayment is less than 20% of the value of the house, you will need to pay for mortgage insurance (PMI), which protects the lender in case you default on your loan. Once you have paid off 20% of the home value, you will no longer need to pay the PMI.
VA Home Loan
The VA Home loan program is a fantastic way for veterans to purchase a home. It is one of the only loans that does not require a downpayment. In addition, the PMI fee is waived, so veterans (or their surviving spouses) do not have to pay any mortgage insurance.
Although you don’t need a downpayment for a VA loan, you may need to pay a 2.15-3.3% funding fee. However, disabled veterans and spouses of deceased veterans are not required to pay the funding fee.
USDA Home Loan
The US Department of Agriculture offers a special loan for folks who want to move the the country. Property purchased with a USDA loan must meet certain guidelines. It must be truly rural and undeveloped, not a farm. This is a 0% down loan, but it does require a 3.5% financing fee, which is applied to the mortgage.