On Real Estate & More – May 2017

Buying a home involves many steps and the type of financing you choose is one of the most important. Just as homes come in a variety of architectural styles and prices, so do the ways you can finance them. While it’s easy to tell if you prefer a ranch style home or a craftsman, figuring out what kind of loan you should get requires a little more investigation. Your lender can discuss all your options in detail, but this will help you understand some of the main loan types.

Conventional Loans:

Conventional loans are also known as conforming loans, since they conform to a set of standards set by Fannie Mae and Freddie Mac. They are the most common type of loans because they offer good rates, low costs and flexibility. Following are the main points of this program:

  • Can be used to purchase a primary residence, second home, or rental property.
  • Are available in fixed rates, adjustable rates (ARMs), and offer many loan terms—usually from 10 to 30 years.
  • Down payments as low as 3%.
  • No monthly mortgage insurance with a down payment of at least 20%.
  • Lower mortgage insurance costs than FHA loans.
  • Mortgage insurance is cancelable when home equity reaches 20%.

“Interest only” loans have a lower payment but the loan balance is not paid off when you make your regular payment.

Government Insured Loans:

FHA Loan. FHA loans were created for lower income households that would otherwise not be able to purchase a home due to poor credit. These mortgages are government-insured, which guarantees that the lender won’t lose its money if the borrower defaults. Here are the main points of this program:

  • Loan limits are capped based on the medium home price in the county the house is located.
  • More lenient credit guidelines. Those with less-than-perfect credit may qualify.
  • Interest rates are lower than some other loan programs.
  • Down payment of only 3.5% of the purchase price.
  • If the home needs repairs, you may opt for the FHA 203k loan (loan that allows you to include the renovation costs into your loan).
  • The seller can pay most of your closing costs.
  • Requires less income and assets than other loan types.
  • Gift money for the down payment allowed.
  • A co-signer on the loan may be allowed.
  • If you refinance in the future, the process is streamlined.
  • FHA Mortgage insurance remains in place for the life of the loan.
  • Cannot be used for second homes or investment properties.
  • The property must be in good condition. Otherwise, an FHA 203k loan must be used.

VA Loan:

Federal and Oregon veterans’ home loan programs gives active or retired military personnel the opportunity to purchase a home with a zero-down payment and no mortgage insurance premium. VA loans also offer low interest rates. Here are the main points of this program:

  • No down payment
  • Minimal closing costs
  • No private mortgage insurance (PMI)
  • Easier refinancing
  • Low rates
  • Must pay a mandatory funding fee that can be up to 3% of the total mortgage amount, although it may be reduced or waived.
  • Backed by the Department of Veteran’s Affairs, these loans involve additional steps during processing which can lengthen the approval process.
  • While borrowers can take advantage of VA limits to closing fees, sellers may be forced to pay them, discouraging many from considering VA buyers.
  • The VA enforces rigid requirements for home inspections, which can delay the process and even impede buyers who would like to purchase the home “as is.” For instance, if the home requires any repairs and the seller is not willing to do these repairs, the home may not be approved for VA financing.

USDA Rural Housing Loan:

This loan is offered by the U.S. Department of Agriculture (USDA) in rural areas. Geared toward low-income buyers, USDA loans can have down payments as low as 0%. Here are the main points of this program:

  • Allows for 100% financing with no down payment.
  • Loan qualifying criteria and credit standards are flexible.
  • Monthly mortgage insurance (PMI) is required but less when compared to FHA loans.
  • Home seller can pay all buyers closing costs and escrow fees.
  • The house must be located in a USDA eligible location.
  • Household income must be below the USDA income limit per county.

Your lender may offer additional types of loans so be sure to contact your lender for details on these programs and others that may be available.