When most people buy a home, it is one of the most exciting times of their life. It can also be confusing and even frustrating, especially when it comes to knowing what type of loan you need. Since the home represents the largest and longest investment most of us will make in our lifetime, it’s important to make the right decisions along the way. There are many different types of loans and loan programs to choose from, including one that is right for your needs. Understanding the different types of loans and knowing if you qualify for them can go a long way in helping to remove some of the pressure.
3 Major Types of Loans
The 3 basic types of loans are FHA, VA and conventional. They are similar to each other in that they are issued by banks and other lenders, but that is where most of the similarities end.
The primary difference between a conventional loan and an FHA or VA loan is that it will not come with a guarantee from the federal government. If you fail to pay for the loan, the government will not be there to stand behind you.
There are strict guidelines in place for conventional loans from the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). These types of loans are open and available for anyone who qualifies, but they are more difficult to obtain than an FHA or VA loan.
Another thing to consider is the down payment. If you are going to be putting less than 20% down on a conventional loan, you will have to pay extra for private mortgage insurance (PMI). The insurance is not there in your corner, it is to make sure the lender is paid in full if you default on the loan.
These types of loans are backed by the Federal Housing Administration (FHA). They guarantee the loan so that it will be repaid if you default on it. It is easier to qualify for a FHA loan than a conventional loan.
Since you are dealing with a federally insured loan, there are certain benefits. Those benefits can include financing some or all of the closing costs, lower costs at closing and a lower down payment (3.5% of purchase price minimum with a qualifying credit score).
You do not have to pay PMI but you will have to pay MIP, which serves the same purpose of guaranteeing the bank they will get their money if you default.
This type of loan is backed by the Veterans Administration (VA). It is not available to everyone. In order to qualify for a VA loan you need to be a member of the U.S. armed forces, reservist or National Guard member. Veterans and eligible surviving spouses also qualify. There is no mortgage insurance required for a VA loan and you can get the home with no money down, if you don’t want to make a down payment.
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