When it’s time to buy your first home, chances are you won’t be buying in cash. A home is a huge investment, and most home buyers require a loan to complete their purchase. Understanding the different options that are available to you is important before you proceed. Use this guide to learn more about loan choices, and contact The Degnan Group for a consultation to find out which one is right for you!
Home loans are broken down into two main categories, conventional loans and government loans. Conventional loans are private loans from mortgage brokers or banks and are not insured by the government. When should you use a conventional loan?
Generally, conventional loans are used instead of government loans for investment or rental property purchases, because government-backed loans are only valid for homes used as primary residences. These conventional loans require high credit and large down payments because they are a little riskier for the lender to make.
There are three main types of government loans, from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the US Department of Agriculture (USDA). These loans are different from conventional loans because they are insured by the US government, which allows the lender to be a little more lenient with their requirements. This means it’s possible to get them with lower credit scores and little to no down payments.
FHA loans are one of the most common on the market. The FHA was formed with the goal of making home ownership more accessible to Americans, so they offer low down payments and accept low credit scores. Common down payments on homes with FHA loans are only 3.5%. However, for any down payments less than 20% the FHA requires lenders to also make private mortgage insurance payments every month until the loan is paid off.
If you’d like to know what your FHA loan will look like, check out the loan calculator here. All you have to do is enter the price of the house you are purchasing, the size of your down payment, and the length of your mortgage, and it will calculate a breakdown of expected monthly payments.
A second popular loan choice for first-time buyers is VA loans. They are only available to veterans, but if you are one this is often the best option for you. VA loan rules are extremely lax, and there are two major benefits to choosing one.
First, you can purchase a house with a VA loan without any down payment. Yes, you read that right. VA loans are approved even for buyers with a 0% down payment. The huge advantage of this is the ability to purchase a home without saving for years.
The second benefit to VA loans is that they do not require private mortgage insurance (PMI). Cutting out this insurance payment from your monthly bills with a VA loan can save you thousands of dollars over the loan’s lifetime.
A third government loan type is from the USDA. The USDA Home Loan program was created to improve life and homeownership in rural America, but the loans extend to cover home purchases in the suburbs as well. Click here for a map to see if your property is eligible.
The main features of USDA home loans are the option for 0% down payments, and flexibility with borrowers who have poor credit histories. Additionally, the PMI payment for USDA loans is calculated upfront and added to your final loan amount, rather than charged as a monthly payment like FHA loans.
Now you know the difference between conventional and government loans, and which one is right for you. Next, it’s time to decide if you need a fixed-rate loan or an adjustable-rate loan from your lender. Fixed-rate loans are loans where your mortgage payment will not change over the 15 or 30 year lifetime of the loan. These are great for people who are buying a house they intend to pay off fully or stay in for many years.
The second option is adjustable-rate mortgages. Adjustable-rate mortgages are set for only five years, after that the amount you pay changes and increases annually. Because of this, adjustable-rate mortgages are recommended for families who are planning to stay in the home for five years or less before selling it.
Understanding the different types of home loans before you purchase your first home is essential. Each one has different costs during the lifetime of the loan, so choosing the right one for your situation can save you (or cost you) thousands of extra dollars over the years.
It may seem complicated at first, but luckily The Degnan Group is here to help. We can walk you through all of your options and explore your eligibility for each loan type so that you are confident in your choice. Every home and homeowner is different, and our mission is to make sure that your needs are always taken care of. Contact us today, we can’t wait to help you find your dream home!