Updated: Sep 11, 2018
FHA, VA, USDA — is this Latin?! Trust us, we understand the overwhelming sense of confusion that can (an will) overcome you when searching for a home loan. Lucky for you, we’re about to take all the stress out of choosing the mortgage that’s right for you and your family (even if that family is just you and Spot the cat).
Mortgage Basics- a BRIEF overview
Mortgages can be daunting, but breaking them down into a few key elements can be much easier to swallow. Sure, you have heard of stuff like interest rates and payments, but there are other things that you might not be so keen on. Here are some key elements we constantly get questions on:
Loan features When you get a mortgage, it often has other stuff that comes with it. After all, this isn’t the same as borrowing money from your mom, banks have fancy lawyers, who have fancy lingo to ensure they earn their keep.
Assumable loans are loans that you can literally transfer to anyone when they purchase your home. This can be a great bargaining tool when interest rates are high, buyers will sometimes pay more for a house if it means assuming a lower interest rate.
Prepayment penalties Basically, you’re punished for paying your loan off early, avoid these like the plague. Since “prepayment” includes the payoff from selling your home, there’s no winning with this one. Just our two cents here!
Mortgage insurance Also referred to as PMI, there are some pros and cons here. To put it simply, mortgage insurance makes it possible for you to bring a downpayment to as little as 3% with FHA or conventional type mortgages, making it a great option for first-time-homebuyers who don't have the liquidity to put down 20%. Pretty cool right? Just know PMI is an additional payment added to your loan every month, that does not go towards your loan's balance. Essentially you are paying for the bank's insurance policy on you, should you default on your loan. Many credit unions have no PMI options so check with multiple lenders or find a mortgage loan officer who can do the grunt work for you.
Down payment Down payments are your initial investment in your home. Many times, home buyers are surprised to see that they have to bring both closing costs and a down payment. Wait... what? These aren't the same thing? Let's break it down- the down payment goes to the bank as proof you have "skin in the game" and closing costs, well, read on!
Closing costs. Closing costs are the bane of buyers everywhere. They can seriously add up with things like appraisals, title insurance, fees to the bank (separate from your down payment) and prepaid items like taxes and homeowner’s insurance. Have I lost you yet? We won't bore you with the minutia but here's the long and short of it:
-Appraisals and title insurance are items you can shop around for to find the package that fits your needs.
-When searching for the right loan be sure to ask about loan origination fees, discount points, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges so you aren't surprised at the closing table.
-Prepaid items a.k.a. taxes and insurance typically go into an escrow account (this is a talk for another day), from which your bank (or whoever holds your loan) will pay your taxes and insurance. So essentially, you pay it now so they can pay it later.
Pick Your Poison: The Four Basic Home Mortgage Types
Understand that these are not the only mortgages out there, but they are the ones that you’re most likely to use in order to buy a home. Each has its own set of benefits and drawbacks, which we’ll discuss briefly. If you prefer colorful pictures instead, see the great graphic from state 27 homes at the bottom of this page.
If you’ve heard of Fannie Mae or Freddie Mac, you know the family of conventional loans. These loans are written by a wide range of banks, from your hometown locally owned to the fanciest mortgage broker. “Conforming” loans meet Fannie and Freddie’s high requirements, including maximum sales price.
Pros: Generally, you’ll get a better deal on mortgage insurance that automatically drops off once your home reaches a 78 percent loan to value ratio. Also, you’ll pay less in closing costs and your debt to income ratio can be somewhat flexible as long as look really good on paper.
Cons: These are generally the hardest loans to qualify for. Your credit score will need to be around 700 and the rest of your life's paper trail must be in mint condition i.e. consistent employment, savings that can be designated as “reserve funds” and minimal "dings" on your credit report.
Federal Housing Authority
The FHA started insuring loans after the Great Depression as a way of helping people get back into owned property. You gotta love the American dream.
Pros: Good option for first time buyers because of low down payment and credit requirements. FHA will accept “soft” credit lines for people who haven’t established credit yet or have very little, so keep that utility bill paid on time. The program allows up to six percent of your closing costs to be financed into your loan, as “seller paid items,” which can help reduce the actual cash you need to close.
Cons: FHA requires a lot more in closing costs because of the additional upfront mortgage insurance deposit. In addition, if you have less than a 10 percent down payment, under the current programs you’ll be forced to keep paying mortgage insurance for the life of the loan, giving you no options but to refinance (meaning paying closing costs, again!).
As part of the benefits that active military members and veterans receive from the government, VA loans are built on a merit-based system. Career military and those honorably discharged early are generally eligible, but short-term members or Reserves may have to meet additional requirements. Anyone who can get this loan will need to bring a Certificate of Eligibility in order to get the ball rolling with an approved lender.
Pros: Favorable interest rates, extremely flexible guidelines and absolutely nothing required as a downpayment (often little to nothing required at closing!) There’s no mortgage insurance, just a one time “funding fee” that varies with your service type, downpayment and times you’ve used your Eligibility.
Cons: Really, there aren’t any. You can’t get this if you’re not military, though, so that could be a con if you really wanted this most excellent loan type.
US Department of Agriculture
In rural areas, the US Department of Agriculture will offer mortgage lending as a way of helping to keep the local economy flowing. Homes don’t have to be on an acreage, but they do need to be located in communities with under 35,000 inhabitants.
Pros: Like VA, USDA are fairly easy to qualify for as the buyer. They can also be zero down loans, though the more you can bring to closing the better. Payment assistance and other types of help are sometimes available for very low income borrowers.
Cons: The house you’re buying will undergo significant scrutiny in order to be approved for the program. In all loan programs, your house has to qualify, but the hurdles USDA puts in front of the building are much larger than most other programs. This is good for you, because it means you’re getting a great house, but it makes the process take a lot longer and can be scary for sellers. In addition, there’s a cap on income for potential borrowers.
So there you have it! We aren't experts on mortgages, so do your research. Talk to a loan officer, or six... And figure out what is best for you. In the meantime, we are happy to share our experiences to make your home buying process as seamless as possible! Thank you to HomeKeeper for some great information!