Buying a home is a major life decision. Most regular people resort to mortgage loans when considering a real estate purchase. The mortgage loan scene may differ across countries – particularly in terms of the types of loans available, their features, loan contract terms, etc. In the United States, when people talk home loans, they are probably talking conventional, Federal Housing Administration (FHA) and/or Veteran Affairs (VA) loans though there are a few other types as well. These loans can be availed at all banks and similar approved lenders; however, they have certain differentiating aspects.
A conventional loan, unlike an FHA or VA loan, isn’t federal government-backed. In other words, the government doesn’t guarantee or insure the loan’s performance. The guidelines for this loan is set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). These loans can be availed by all citizens; however, qualifying for the same can be quite difficult, especially when compared to FHA and VA loans.
Lenders are at a higher risk when issuing conventional loans because if the borrower falters with the repayment, the lender has no remedial measures to fall back on. As a result, the income and credit requirements for a conventional loan applicant are stricter. Individuals with a good credit history, steady income, and ability to pay the down payment are likely to get a conventional loan.
Conventional loan amounts need private mortgage insurance cover too until the borrower’s home equity share is at least 20 percent. Also, sellers cannot contribute to the loan’s closing costs in excess of 3 percent.
An FHA loan is a more secured loan vehicle, from the lender’s perspective. If the borrower defaults with the payments, the FHA then has to clear the lender’s dues. As a result, lenders are more forthcoming with FHA loans, willing to offer attractive terms to borrowers – including low down payment, and low financing and closing expenses. The down payment can be as small as 3.5 percent of the total loan sum. Also, the seller’s contribution to closing costs is comparatively high at 6 percent.
It’s much easier to qualify and get approved for an FHA loan. However, there’s a limit to the maximum amount of funds you can loan out. And this ceiling amount could vary across states, based on the particular region’s average housing costs. Also, FHA loans need PMI, but not to the score of a conventional loan.
The VA loan, as the name indicates, has the backing of the Veterans Administration. This loan can only be accessed by specific borrower groups via VA-approved lenders. Again, the VA offers to clear the lenders outstanding loan amount in case the borrower fails to oblige. A VA loan is more of a niche setup since it is available only to a current American armed forces’ member, national guard member or reservist, veteran, and the spouse of a deceased armed forces personnel.
There are some major benefits to VA loans. For example, borrowers with an active VA loan and who meet specific criteria have the option to refinance at a reduced rate of interest whenever the fresh rate becomes valid in the market. Also, the old loan’s closing costs can be rolled into the new loan. There are no income restrictions or PMI or down payment requirements. This makes the loan an ideal option for people with zero cash reserves, limited income and a lower or average credit score.
The above is a fairly broad picture of the home loans available to home buyers.. If you’re willing to dig deeper, you’ll discover that each of the loans aforementioned have their own sub-types and flavors. Also, they are not the only home loan types. Some of the other variants include USDA/RHS loans, jumbo loan, and conforming loan, to name a few.