The Top 3 Loan Types

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( — June 5, 2018) — There are a plethora of possible loan-types out there today, and it’s easy to get confused and bogged down in the details before you even get a good look at the “big picture.”

For most borrowers, there are three major loan categories to choose from: a conventional loan, and FHA loan, or a VA loan.

Knowing what are the strengths of each of these loans and comparing their requirements to your own specific situation is key if you want the best possible deal on your mortgage.

Don’t just assume that the loan your friend or relative used will work best for you or that a loan you heard a tantalizing ad concerning is your optimal choice. You need to “do your homework” and probably get some helpful advice from a loan expert to be sure.

Why Choose a Conventional Loan?

Maybe you are or maybe you’re not a “conventional” sort of personality, but that’s not the point here. The term “conventional” as applied to home loans simply means that it’s a loan NOT GUARANTEED BY THE FEDERAL GOVERNMENT.

Conventional loans are of several different types:

  • Conforming loans, which “conform” to standards established by Fannie Mae and Freddie Mac. Those are the two semi-private entities that buy up mortgages and sell them to investors.
  • Non-conforming loans, which do not conform to Fannie Mae/Freddie Mac standards. If they exceed the normal limits of loan size, they are often dubbed “jumbo loans.”
  • Portfolio loans. These loans are held by private lenders in their portfolios rather than sold off to other investors. You can often get more flexible terms with portfolio loans.
  • Subprime loans. These loans are given out to those with low credit scores and may have higher interest rates and fees.

There are several good reasons to opt for a conventional loan. First, you can get higher loan limits than with many government-backed loans. Second, you can avoid having mortgage insurance if you can afford a 20% down payment. Third, your down payment can be only 3% to 5% if you have good credit. Fourth and final, you can finance multiple properties simultaneously (up to 10) if you meet certain criteria.

Conventional loans require better credit scores, better debt to income ratios, and may require a higher down payment and more out of pocket closing costs. But, they are quicker and easier to process than FHA or VA loans and are generally ideal for those who can get approved for them.

Federal Housing Administration Loans

The FHA does not actually lend out any money on mortgages – they simply insure mortgages. But, when they do that, it makes possible a slew of specific loan-arrangements that would otherwise not likely be approved.

FHA loans help people with lower incomes, lower credit scores, and less money for down payments and out of pocket expenses still get into a home mortgage.

You can pay up to 57% of your monthly income on debts (including the house payment) and still get approved for the loan. And a credit score as low as 580 may not prevent approval.

However, you do have to pay an FHA mortgage insurance premium upfront (1.75%) and per year (maybe 0.8%) on what is usually a 30 year mortgage.

Veterans Affairs Loans

If you are an active or retired military member of spouse of a military member, you likely qualify for a VA loan. For low income veterans, there is usually no better option.

Down payments are zero if you plan to live in the home you’re buying. There is a VA fee of from 1.25% to 3.3%, but that can often be rolled into the loan or paid by the seller. And closing costs are also often handled by the seller, though sellers aren’t required to do so.

The bottom line in choosing among these three loan-types: VA loans are best for low income veterans, FHA loans for low income or poor credit-score borrowers in general, and conventional loans are usually superior for those who can get approved for them.