Home Loans Explained
There are four types of loans that we’ll discuss.
- Conventional Loans
- FHA Loans
- VA Loans
- Reverse Mortgages
What we mean here is a loan that does not have government backing, insurance, etc. It’s the way we used to do business. The bank looks at what you will put down, calculates how much you make, and decides how much you can borrow and still make payments comfortably. Unfortunately, these loans have become toxic because unscrupulous lenders allowed borrowers to borrow way over their heads, with actually no prospect of being able to comfortably make the payments.
Now, to get a conventional loan, you pretty much have to have at least 10% down payment, and the rates vary. An example of this would be on a home costing $250,000, the buyer will have to put $25,000 down, and may also have closing costs (loan fees, title fees, escrow fees, etc.) that total another $6-10K. Additionally, with 10% down, the lender is going to require PMI (Property Mortgage Insurance), that will usually be in the $200 per month range for a loan of this value. Conventional home loans require an experienced lender, so I recommend Joyce Nathan of Home Services Lending to answer your questions and get you answers.
FHA loans are the darling and salvation of the lending industry now, and that holds true for you, the buyer. FHA means Federal Housing Assurance, and it means that under the terms of the loan the government will effectively insure the lender if you happen to default and quit paying your loan off.
The terms of the FHA loan are quite reasonable, making the purchase of a home with this type of loan very, very popular right now. Under an FHA loan the down payment can be as low as 3.5%. So, in the example above, a $250,000 home requires that the buyer put down $8750. That’s a far cry from the $25,000 that would be required with a conventional loan. it’s true, however, that closing costs (loan fees, title fees, escrow fees, etc.) can still be as high as $6-10K in this case, but we’ll talk below about how savvy borrowers and Realtors help with this.
Perhaps the most important part of an FHA loan, however, is that a family member can contribute the down payment for the borrower!! You can’t do this with a conventional loan, a VA loan or an investment loan. This is really important, and is part of the reason why buying a home with a family member can be so easy and beneficial. If, for instance, dad and mom want to help our their kids by contributing, the kids will be able to look for a home based on what they can afford to pay on a monthly basis, and they won’t be excluded from buying because they don’t have enough money in the bank right now for the down payment. It’s the perfect loan in this case. If you need any information on FHA loans, or doing a loan with a family member, then please contact award winning Realtor Don Reedy for a consultation.
VA loans are loans that are made to Veterans, with terms and conditions intended to protect them and give them an opportunity to buy when they might otherwise not be able to do so. These loans can often be obtained with no down payment required, and costs that for the $250,000 home we are talking about run about $5000. There is NO PMI for a VA loan, as opposed to a conventional or FHA loan. Additionally, the qualifications for a VA loan are tied to income rather than debt to income ratios, often making it much easier to qualify.
By the way, rates for VA loans are usually just a tiny bit higher than conventional loans, but the monthly payments and costs more than offset that. VA loans are little understood by most lenders, so if you are in the market for a VA loan, I suggest you contact Brian Brady, who just simply knows these loans in and out.
If you are a homeowner who is at least 62 years old, then understanding Reverse Mortgages is perhaps the greatest gift you can give yourself. A Reverse Mortgage is a government sponsored program that will allow you to access the equity in your home to get cash. You can also use a Reverse Mortgage to purchase another home, and never make another house payment. We work with Bank of America to help Seniors learn about and take advantage of Reverse Mortgages.