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The 4 Types of Home Loans

In Buyers, Homeowners by Doug Phelps

When homebuyers talk about their mortgage, it is more of an umbrella term when in actuality there are 4 major types of home loans all with different perks and benefits. For example, the best type of home loan for a first-time homebuyer may not be the best loan type for an experienced homebuyer.  Individual variances may impact which loan type is best for you and your situation. Below is a quick high-level breakdown of the 4 major loan types: conventional loans, FHA loans, VA loans or USDA loans

1. Conventional Loan

This loan type is most popular because it comes with the lowest amount of requirements and therefore may make it a good choice for those looking for flexibility. For example, conventional loans can be written for 15 or 30 years which means a buyer can pay off their loan quicker if that is the longterm goal. Always inquire about any possible early pay-off penalties, if they apply. However, these loan types have other perks attached like if a homebuyer has better than average credit that means that the given interest rate will be lower.  A conventional loan may require a 3% down payment and if 20% or more is put down, then PMI (private mortgage insurance) won’t apply and the monthly payment will be even more cost effective. Be aware that there are two different types of a conventional loan: fixed rate and ARM (adjustable rate mortgage).

2. FHA Loan

An acronym for Federal Housing Administration, this loan type may make a good choice for first time home buyers and/or those buyers who are repairing their credit score.  An FHA can be acquired with a credit score of 580 or above, which is slightly below the national average.  An FHA may come with a few more administrative fees attached such as lifetime PMI and funding fees.   

3. VA Loan

Specifically for those who are active military, or had served at some point, VA loans are government backed by the Department of Veterans Affairs. VA loans don’t typically require a downpayment and PMI is usually not an included fee. Therefore, if one is in the military, these are a great option for a homebuyer who may not have a 20% downpayment saved. These loan types can be used more than once, for example a VA loan is not just for first time homebuyers. The VA may also provide help if a homeowner has an issue with making payments in the future.  However, lenders may require more of the homebuyer than another loan option.

4. USDA Loan

A loan type not often thought of, these loan types are not just for farmers even though they are named after the US Department of Agriculture. These loan types are however for those in what is considered rural areas and small towns.  These loans may come with funding fees and these are only available for US citizens.  These loans also have term options of 15 or 30 years. A homeowner must also live in the mortgaged residence, so this is not a good option for a second home.

Do you have concerns or questions about loan types? Are you in the market to buy or sell your home?  Call and text me at (720) 323-4176 or email me at [email protected]