What is the Best Loan Option for my Home Purchase?

What is the Best Loan Option for my Home Purchase?

The first thing that any perspective home buyer should do is get their financing defined and approved. The interest rate, down payment, loan term, total PITI and Mortgage Insurance (PITI = Principal, Interest, Taxes, Homeowners Insurance) should all be completely understood and agreed to before you ever step foot in a home for sale. The closing costs of the loan should be disclosed and understood as well. The cost of credit is different from lender to lender and the perspective home buyer should receive ?good faith estimates? from more than one potential lender. There are generally 4 types of loans that are on the market today. The loan by type can play a role in what properties are eligible for a buyer to pursue. The four loans are FHA Financing, Conventional Loans, VA loans and USDA loans.

FHA Loans

The most popular loan on the market today is an FHA loan. An FHA loan comes with government mortgage insurance and is designed to help lower FICO and income borrowers obtain the dream of home ownership. The down payment requirements on an FHA loan are 3.5% of the purchase price and make this loan very attractive for borrowers with lower reserves for the down payment and closing costs. The FHA loan also allows up to 6% seller contribution to the buyers closing costs. Translated that means that in many cases the buyer only needs the 3.5% down payment to buy the property. The mortgage insurance monthly payment is higher than any other loan however this in part is due to the lower down payment as well as the risk factor associated with the loan. FICO scores at the time of this publication would allow an FHA loan with a score of 580 or above however in many cases the score will need to be 600. Please clarify this with your lender. There are lending limits on FHA loans and these are governed by the different locations dependent on average home prices.

Conventional Loans

The second most common loan is a conventional loan. For this discussion think ?Freddie Mac and Fannie Mae? loans. These loans have private mortgage insurance. The mortgage insurance you will pay will be less than an FHA loan due to both a higher requirement of FICO score and down payment. These loans will go up to 417,000.00 with exceptions of higher cost areas of the United States as determined by the Federal Housing Finance Agency. The minimum down payment for these loans is 5% and the minimum FICO at the time of this publication is 640. Seller contributions on 5% down loans are capped at 3% however at 10% down or more the borrower may be allowed 6%. The mortgage insurance is less on conventional loans because the risk profiles of the loans are less. These loans are the more attractive loan if you are getting involved in foreclosures.

VA Loans

This type of loan is only available to active and retired military personnel. The eligible borrowers must have had an honorable discharge if they are not currently active military. Should you meet these criteria this loan allows the most flexible of terms and there is no down payment or mortgage insurance required. There can possibly be a funding fee attached to the loan however this can be waived on disability ratings or active status. This loan is the most aggressive currently allowed and has a larger risk factor due to the lack of down payment required. The only downside to this loan is that bank foreclosures will generally shy away from this type of loan due the more defined condition requirements in the appraisal. However if you are eligible for this loan there is absolutely nothing more accommodating on the market.

USDA Loans

These loans are also 100% financing are designed to stimulate and target rural growth in the real estate markets in the United States. Rural means nowhere close to the city limits where by definition there is a lack of population and infrastructure. These loans define their eligibility by map definitions. The details and eligibility requirements should be discussed with your lender.

I hope this helps give you a better overview of the types of loan options that may suit your needs. Remember all lenders do not operate the same. You should speak to more than one lender about their offerings and proprietary products.

Source: http://blog.tombrewerjr.com/2012/07/what-is-best-loan-option-for-my-home.html

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