How to Choose Best Home Loan for You

Most home buyers walk into a bank, a credit union, or into a lender’s office with one big goal in mind – to get pre-approved for a mortgage loan. But what kind of mortgage loan? Did you know there are three different kinds? Knowing the type of loan best for you can save you hundreds of thousands of dollars so let’s dive in and check them out.

The three most common home loans:

  1. Conventional
  2. FHA, and
  3. VA

Each of these home loans come with its own set of requirements and regulations, and advantages and disadvantages. By taking a closer look at each one, we would be able to compare and gain a thorough understanding of our options.

1. Conventional loans

Image result for big bankPhoto: The Finanser

 

These are loans that do not involve government cooperation and are not government-insured. They are offered by banks. Different types of banks offer conventional loans. Some of the requirements when applying for a conventional loan include the following:

  • Typically 20% down payment
  • Debt to income ratio should not exceed 36%
  • Strong credit score, pending the loan program
  • Must have stable employment – typically at least 2 years of continuous employment
  • Requires you to pay PMI (Private Mortgage Insurance) monthly, if you have less than 20% down payment

 

2. FHA loans

Image result for Federal Housing Administration FHA loan applicationPhoto: Pioneers Home Loans

 

These loans are from the Federal Housing Administration (FHA), which was created in response to the multiple foreclosures in 1934 during the Great Depression. The FHA doesn’t make loans to borrowers, rather it is a government-backed entity that insures the loans made by the lenders. So the lenders loan you the loan, and the FHS insures 100% of the loan amount.

The lenders are encouraged to lend with the government taking on the risk if or when a borrower defaults. This is how the government helps to build an economy. The FHA will only insure a limited amount depending on the location of the property. Below are some of the requirements when utilizing a FHA home loan:

  • 3.5% down payment
  • Many first time buyers take advantage of this program
  • There’s a table that shows the maximum loan amount per County (For example, in Los Angeles county: $625.500)
  • A minimum of a 580 FICO score is required for the 3.5% down payment option
  • If credit score is between 500-579, the required down payment is 10%
  • Mortgage insurance of 1.75% is required
  • Have many loan structures to meet a variety of borrowers needs

 

3. VA loans

Veterans want to feel like regular citizens who are doing their best to live a happy life with loved ones in a community they feel they belong. (photo/Veteran's Impact)

Photo: Veterans Impact

 

VA-loans are available only to those who have served in the US armed forces. To get this type of home loan, an interested veteran needs to request a certificate of eligibility from the VA Regional Office before starting the application process. The certificate shows the veteran’s entitlement and the amount of loan guarantee. The lender is compensated by the US Department of Veterans Affairs (VA) for any losses incurred in a foreclosure. Some of the benefits when using a VA loan are the following:

  • 0% down payment
  • VA allows for the seller to pay all of the buyer’s closing costs
  • No mortgage insurance premium is required

 

Image result for loan officerPhoto: Great Western Bank

 

Buying a home can be a very exciting time. For some, it’s the turning point, a milestone. However, the loan process can also be intimidating, tedious and complex. Knowing the types of home loans is a great start, and speaking with a loan officer or a mortgage loan broker who is knowledgeable and familiar with several loan products, will help tremendously at a time when you’re making one of the largest financial decisions of your life.

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