Loan Types & How They Impact You
There is a mortgage loan type for every different situation - from new builds to total rehabs. Every loan type carries specific and individual terms, requirements and guidelines. In this article we are going to discuss the four primary loan types and how they work.
Conventional
FHA
VA
USDA
The type of mortgage you use will impact the following:
The Home You Can Buy
Your Interest Rate
Where You Can Buy
Your Down Payment
Appraisal Conditions
Chances Your Offer Is Accepted
Before we dive into loan types, lets define some of the reoccurring terms you will see below
Mortgage Insurance: This is a monthly fee that is included in your mortgage and is required when you .put less than 20% down on a loan. Conventional loans refer to this as PMI , FHA refer to this as MIP and USDA loans refer to it as an annual fee. VA does require mortgage insurance.
Government Backed/Guaranteed: Any government backed or guaranteed loan protects lenders against default payments. FHA, VA and USDA are government backed or guaranteed.
Appraisal Condition: A home appraisal is not limited strictly to price. Government backed or guaranteed loans typically come with strict appraisal conditions, in addition to the price, that make sure the home is up to their standards. These conditions usually focus on the safety and security of the home, rather than it’s actual value. Examples of these conditions include, but aren’t limited to, the following: chipping paint, missing hand rails, unfinished rooms.
Down Payment: This is the initial bulk payment you make on the loan. Your closing costs include your down payment but is not limited to it.
Conventional
Most popular loan type
Flexible appraisal conditions
3.0% Minimum down payment for first time buyers
5.0% Minimum down payment for non-first time home buyers
Require PMI without at least 20% down
Typically a 30 day closing
FHABacked by the Federal Housing Administration
Lower credit qualifications
Higher interest rate
Strict appraisal conditions
Require certain inspections
3.5% Minimum down payment
Typically a 45 day closing
VAOnly available to military service members, veterans and their spouse’s
Guaranteed by the VA
0% Minimum Down Payment
Does not require mortgage insurance
Low interest rate
Strict appraisal conditions
Require certain inspections
Limited closing costs
Typically a 45 day closing
USDAGuaranteed by the US Department of Agriculture's Rural Housing Service agency
Geographic limitations
Income limitations
Strict appraisal conditions
0% Minimum down payment
Lower interest than FHA loans
Require certain inspections
Annual fee (lower than typically PMI)
Typically a 45 day closing
How to know which option is best for you
The loan type you use is largely circumstantial. It is possible to get pre-approved for multiple different loan types so that you can decide which one to go with, depending on the offer you would like to make. If you are in a multiple offer situation and are pre-approved for both Conventional and USDA loans, it may be best to go with conventional because the terms could be more favorable to the seller. If you aren’t in a competitive situation, and are pre-approved for multiple loans, you can go with the one that serves you the best terms.
From a sellers perspective, conventional loans are typically preferred because they close faster and have less appraisal conditions than government backed or guaranteed loans. Some homes will not qualify for government backed or guaranteed loans.
Loan type can make a big difference in an offer being accepted, especially in competitive scenarios, but you can overcome this by changing other favorable terms. It is best practice to discuss all your lending options with your lender. I always recommend using a local lender over banks and online lenders.