There are many things to consider when deciding on a type of mortgage. Before going into specifics, such as fixed rate or adjustable rate, you’ll need to decide between government and conventional programs, and it’s important to know the differences. Both government (generally FHA, USDA and VA loan) and conventional programs have pros and cons depending on your situation.
The most common government loan is an FHA loan. ‘FHA’ stands for the Federal Housing Administration, which insures these loans. The federal government insures loans through the approved lenders in order to reduce the risk of a loss to the lender in the case of a homeowner defaulting on their mortgage. Mortgage Insurance Premiums are part of this protection. Through this system, borrowers pay a 1.75% upfront fee and a monthly 0.85% premium. Generally, the mortgage insurance stays in place for the life of the loan. By having these standards and protection, the FHA is able to lend to borrowers with lower credit scores, and with options for low down payments.
Conventional loans must comply with the guidelines set by Fannie Mae and Freddie Mac, the government-sponsored enterprises who buy mortgages on the secondary market. Fannie and Freddie’s guidelines are stricter than the FHA, and include good credit, strong financial status, and larger down payments. However, these strict policies allow for a quicker and easier approval process. Conventional loans do not require any upfront mortgage insurance payment, but private mortgage insurance is in fact required if the borrower makes less than a 20% down payment. This mortgage insurance may be canceled once 20% of the home value has been paid. Once 22% has been paid, the mortgage insurance is removed automatically.
When you are ready to purchase a home, I would love to meet with you and help you decide which loan type is the best for your financial situation. Call me today to set up an appointment.