When purchasing a property, one of the first questions I get asked a lot of times by clients is what type of loan is best for me to get this property and to benefit me in the short run and long run? There are so many different types of loans out there today and each one seems to have some benefits and some challenges. Some are directed at specific individuals with specific needs while others are broader and cover a range of properties and people. Today I’m going to talk about a few of the different types of loans out there as well as the benefits and challenges of each type. Since there is so much information with each loan, I am breaking this blog into a few weeks to really cover each loan thoroughly.
Conventional Loans – This is one of the most common loans today for home purchasers. A conventional loan is a mortgage loan from a mortgage lending institution not backed by an agency of the government such as the Federal Housing Administration or Department of Veterans Affairs.
· Pros – Conventional loans are usually quicker because they require less paperwork and can be obtained faster than government insured loans. There is also no dollar limit placed on a conventional loan and some lenders do not even require mortgage insurance that will lower monthly payments.
· Cons – Conventional payments usually require a higher down payment, around 20% which is fairly larger than an FHA loan which can require as little as 3.5% down. So more money is required upfront. When it comes time to pay closing costs, conventional loans must be paid at settlement and cannot be rolled into the mortgage as you can with an FHA loan. The lending company sets loan organization fees and there is a chance they may be higher than government agencies.
FHA Loans – An FHA loan is a mortgage administrated and insured by the Federal Housing Administration (hence the name F-H-A). Borrowers who choose an FHA loan pay for mortgage insurance that protects the lender from any losses if the borrower defaults on the loan.
· Pros – Probably the biggest upside to an FHA loan is that you don’t need a big down payment for an FHA loan; some can be as low as 3.5%. Going along with that, since an FHA loan requires only a minimum cash investment, it is the ideal loan for someone who has not been able to save much money for purchasing a home. Also if you can’t apply for a conventional loan due to foreclosure or bankruptcy, there is a possibility you still might be able to qualify for an FHA loan.
· Cons – Probably the biggest con to an FHA loan is the mortgage insurance premium (MIP) that are required for this type of loan. One is Upfront that is financed into the mortgage and one is Annual that is paid monthly. These payments can last anywhere from 11 years to the lifetime of the loan. Also because of the low down payment, in the long run you will pay more interest on an FHA loan than you would a conventional loan.
These two loans are probably the most common loans for homebuyers today. I will cover more next week but if you are starting to think about buying a home and want to chat more about loans and what one would cover your interests best, feel free to shoot me an email and I would be happy to sit down and talk with you.