For most buyers, the first thing to do when starting your home search is to get pre-approved for a loan. This will let you know exactly how much you can afford and you won't waste time looking at homes above your price range. Also, there are some buyers that qualify for more than they want to spend. It's all about you having a comfort level that you're going to get a home you love at a monthly payment you can feel good about. The amount a bank will loan you depends on a number of factors including income, current debt, credit score and your down payment amount. Loan types and requirements change regularly so we always advise speaking with an experienced professional. If you need some guidance we'd be glad to help get you in touch with one of the lenders we've worked with for many years.
Even though we always advise speaking with a professional to determine your exact needs and qualifications we want to take a moment to go over some of the most common loans available today. Many would-be buyers believe they need a LOT of money to buy a home; this simply isn't true and we'll show you why.
A conventional loan is the most basic loan type and is usually used by very qualified individuals that normally have a good amount of cash to put down. Though there are some conventional loans that require very little down you get a much lower interest rate as you put in more of your money since the bank assumes less risk. With any loan, unless you have at least 20% equity in the home you will need to pay private mortgage insurance on a monthly basis.
- Less stringent home requirements (think fixer-upper)
- Quickest to close
- Least amount of hassles to finance
- Lowest interest rate
- Stricter qualifying guidelines
- More money down
The Veterans Affairs (VA) loans are a great loan type for military personnel and veterans. These loans allow a borrower to finance 100% of the home they are buying and only need to pay for closing costs. It's a government backed loan meaning that if the borrower defaults the bank is insured against any losses. This is a very popular loan type in our area due to the proximity of housing to many of the nearby bases and installations.
While 100% financing is very attractive there are some downsides to VA loans. You will not be able to buy a house that needs anything more than just small cosmetic work. Also, you will pay more money up-front in closing costs. However, some of these additional costs come from the funding fee that eliminates private mortgage insurance saving you money every month.
- 100% financing, no money down!
- No private mortgage insurance
- Higher closing costs
- Strict guidelines for home condition
- Can only have 1 VA loan at a time
FHA loans are also government backed loans but they are provided by the Federal Housing Administration to assist first-time homebuyers. FHA loans only require the buyer to put 3.5% of the purchase price towards a downpayment. There are also FHA rehab loans (203k) that allow a buyer to roll repair costs into the loan amount instead of having to pay out of pocket. This is an attractive option especially for buyers looking at foreclosure properties.These loans also have less stringent credit score requirements than most other types meaning they are easier to qualify for.
Of course there are negatives to FHA loans as well. Except for rehab loans, homes must meet certain minimum standards and conditions in order for the government to back the loan. Also, similar to VA loans, there is an up-front funding fee that raises the closing costs paid at settlement. Unlike VA loans, FHA loans do still require private mortgage insurance to be paid monthly until the property has at least 20% equity.
- Low downpayment (3.5%)
- Rehab loans
- Strict guidelines for home condition
- Up-front funding fee
- Private mortgage insurance
Just a note here about interest rates and comparisons between lenders. If you are going to compare one against another, just make sure the test compares apples to apples. Ask for both rates on the same day. If you ask one lender on Friday and the other on Monday, there may well have been a slight change that happened since the weekend. And also ask to see the entire menu of any fees that will apply. Those of you looking into brokers, especially out of state brokers, know that there is no free lunch. That broker isn't doing you a favor out of the goodness of his heart so be extra careful. In 25 years of doing this, we see many more problems with brokers than with direct lenders. Sure some of them are very good-it's just that in that industry it can be very difficult to tell the good guys from the bad guys.