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*This is the third part of the mini-series on buying a house.
In order to buy a house you’ll turn into your home, it’s important to know what loan you qualify for. I think it’s also important to understand the various loan options available, as well. There’s a need to understand your own finances and budget, as well as just your loan qualification amount. Take a look at the first part in this series to evaluate your finances when buying a house for your family.
There are many different types of loans today. This is both a good thing and cause for overwhelm. Attempting to sort out what loan you may qualify for, as well as the pros and cons of each type could get cumbersome. I’ll give you this relatively brief overview of the different loans now.
Conventional Loan – decent credit, down payment
The basics of a conventional loan are that you have decent credit, decent income, and money available towards a down payment. For a conventional loan with a higher credit score, you’ll get a lower rate interest. Additionally, your down payment amount might help in lowering the interest rate as well. The general rule is that a 20% down payment is good. You can get a conventional loan with a lower down payment though.
Within this category, you also have a fixed rate or adjustable rate interest. With a fixed rate, it’s rather simple, the rate at which you qualify will remain the rate throughout the life of the mortgage. Although, if you refinance at any time, this may change. An adjustable rate can happen in a few different ways. The main thing to know is that an adjustable rate usually changes with the tide of the market.
My opinion is that an adjustable rate is not a good thing. There have been times that getting an adjustable rate while the market is high, but expected to lower is a great option. Personally, I believe a fixed rate mortgage loan is the best way to go. I like to always know what’s happening and expected. Admittedly though, I’m not all that great when it comes to change.
FHA – always fixed rate, lower income bracket needed, decent credit, first time homebuyers
This type of loan is backed by the Federal Housing Authority (hence the name, FHA). Traditionally, an FHA loan is only for first time homebuyers and those with lower income. While this is true, it’s not the entire story. In other words, it is possible to get a FHA loan as a second or third time homebuyer.
With an FHA, the interest rate may be in the moderate to lower category, it will always be higher than the lowest interest rate with a conventional loan. Additionally, with an FHA, you’ll also always have something called PMI or Private Mortgage Insurance, also known as mortgage insurance. This is rolled into your monthly mortgage payment. As such, it’s definitely something to account for when analyzing your income and expenses.
Also, with an FHA, this PMI never goes away. Once upon a time, PMI went away after a certain period of time or there was an 80% loan-to-value ratio. This isn’t really the case any more, due to some more recent changes. And just so you really understand PMI, it does absolutely nothing for you. Private Mortgage Insurance is designed entirely to protect the banking institution(s) in the event you stop paying. Personally, I have quite a few issues with this, but this is the state of our economy (:shrugs:).
When opting for an FHA mortgage, understand the house itself needs to meet certain parameters. In other words, the basic thing to know is that the house must me ‘move in ready’ with no ‘structural issues’ or potential health threats. This is something your agent (hopefully a buyer’s agent) should help you with understanding, as they know key areas and issues to look for that you may not view as big deals.
FHA 203k – useful for a house that needs a good bit of work, timeframe required for the work to be completed
Quite similar to the already mentioned FHA mortgage, an FHA 203k has a bit more flexibility though. You can buy a house that’s a fixer-upper, but you cannot occupy it while repairs/modifications are happening. The constraints of required the repairs may be cumbersome and unless you’re already a licensed contractor, you likely cannot do the repairs yourself.
In addition, renovations cannot exceed $30,000 in total and there have to be multiple bids for the work. So, if you find a great house that needs some work and don’t need to worry about moving immediately (or very shortly) after closing, this might be an option. Just remember, you cannot live in the house while the work is being done, though you still have to pay your mortgage.
VA – available only to those who served in the armed forces
This loan is backed by the Veteran’s Administration. At the end of the day, it’s really quite similar to an FHA, though only available for those that served in the armed forces.
USDA – lower income, usually rural, similar to FHA
A USDA loan is usually only available for rural and/or targeted areas in need of residents and/or housing, as determined by the federal government. This loan type is also basically an FHA. Check with the USDA (link here) to see if your area (or an area near you) is eligible for a USDA loan. Also, it’s important to note that not every banking institution can work with you if you choose a USDA loan. This site does help guide you though. (link here)
Fannie Mae HomePath – some cross between FHA and conventional. Usually only foreclosed homes.
Essentially, Fannie Mae had to find a way to sell homes that were bought during the boom of real estate and subsequently foreclosed on. The difficulty is that many of these homes have sat for quite some time while in the foreclosure process and though may be great homes are also in need of some important or major repairs. Additionally, you’ll need a down payment of 15%.