Types of Home Loans & Why They Matter
A USDA loan offers 100% financing with 0% down. This type of loan is used to encourage home ownership in rural areas. Qualification is similar to other home loan programs as based on household income. Unlike other programs, a USDA loan has population requirements for eligible properties. One downside of this type of loan is the underwriting process.
USDA loans get underwritten twice, once by FHA and then the other by USDA requirements. The closing time for this type of loan is longer and typically falls between 45 to 60 days. Because of this, these loans can sometimes put a buyer at a competitive disadvantage when there are multiple offers on a given property.
With an FHA loan, buyers are required to put three and a half percent down. These types of home loans are typical for first time homebuyers and qualifications are based on household income. There are a few downsides to this type of loan. Condominiums and multi-unit properties do not always qualify for FHA loans because these types of home loans have regulations regarding the number of investor owned properties in the complex. The second downside is that FHA has requirements regarding types of repairs that need to be completed before the loan can be funded.
This can reduce the number of eligible properties available for buyers with an FHA loan. Types of conditions that would need to be resolved include peeling paint or any code violations such as missing handrails. Lastly, with an FHA loan, you forfeit your ability to remove private mortgage insurance once you’ve reached 20% equity in your home. This can only be done if you refinance into a conventional loan.
A VA loan is available for active or retired members of the military. VA loans offer 100% financing for up to $647,200 in 2022 for Madison County. Anything above that requires a 25% down payment on the difference. This type of loan also requires the seller to pay for some of the closing costs.
Due to the extra closing costs requirements and loan conditions in a competitive market, some sellers prefer cash or even conventional loans above the VA loans.
A Conventional home loan typically requires between 5% to 20% down, but there are conventional programs for as low as 3%. For buyers that put 20% or more down, there is no private mortgage insurance or PMI required. This saves you monthly on your monthly mortgage payment. This type of loan provides the most competitive advantage in the seller's market next to cash offers.
If you’re not sure of a lender to use, contact us and we can introduce you to a local lender to help you determine which loan type is best for you.Posted by Matt Curtis on