Here’s a question we get from buyers…, which is Best FHA or a conventional loan? And that is important to know if you’re buying a home.
This blog is about the different types of mortgage loans and how they work so you’ll have an idea which one fits your circumstances.
There’s four types of mortgage loans. there’s the conventional loan and then the three government back loans, FHA. USDA and VA.
Conventional loans aren’t backed by the government. so lenders consider them more risky and they require higher credit scores and the interest rate maybe slightly higher. if you put down less than 20%, you’ll pay private mortgage insurance, which insures the loan for the lender in case the buyer defaults on the loan.
The appraisal for a conventional loan is a fairly simple process. the appraiser just determines the home’s value. and these loans work for a primary residence as well as a vacation home.
As long as the home is not a total rehab project and that’s a whole different category of loans, which i’ll cover in a coming article. So, as long as the home is not needing major rehab, a conventional loan should work even if the home is not in, the greatest of condition.
The condition is looked at, but just in the sense of how it affects the value of the property. Appraisers for conventional loans don’t usually make a list of repairs that have to be done in order to get the lender to do the loan, as long as the value is equal to or above the sales price or the loan amount.
But a government backed loan is a different story. It has to meet specific standards and the appraiser has to perform two duties, appraise the property and inspect the property and specific standards for the home’s conditions have to be met.
If the appraiser cites something on the appraisal form that doesn’t meet those standards, it will have to be corrected before the loan is approved.
So for this reason, sellers usually prefer conventional loans because there is less of a chance that settlement will be delayed because repairs will be required. Plus conventional loans require a higher credit score. and that helps the seller feel more confident that the buyer is able to buy the house.
So government backed loans all have tighter standards for what’s acceptable and they only work if the home you’re buying is going to be your primary residence.
But beyond that, there are differences between a VA, FHA and USDA loan.
The first is eligibility. VA loans are only for active or ex military and their family members. They can require a funding fee which can be between 2- 3% of the loan amount. And even though they are zero down loans, they don’t require mortgage insurance, which is a big advantage for VA loans.
USDA loans are also zero down, but they do require you to pay mortgage insurance. And the eligibility criteria requires that the home is in a rural area and the Eastern Panhandle fits that eligibility. USDA loans can take a bit longer to get to settlement because they have to go through two approval processes. first. the lender has to approve the loan and then the USDA has to approve the loan and how long that takes often depends on how busy the USDA offices are in your area.
The required credit score for USDA and VA loans is a bit higher than what is required for FHA loans. FHA loans have the lowest credit score requirement of all these loans, but they do require 3.5% down and you pay mortgage insurance regardless of how much you put down on the loan.
So summing it all up, conventional interest rates are a little higher. they do have a less demanding appraisal requirement. They require that you pay private mortgage insurance if you don’t put 20% down,
A VA loan is zero down, requires no mortgage insurance but they may require a funding fee and it’s for military and their family.
USDA is zero down and requires mortgage insurance and may take a little longer to get to settlement.
FHA loans have the lowest credit score requirement. They are 3.5% down loans and you pay private mortgage insurance regardless of how much you put down.
So which of these loans is right for you?
If you’re in the military, a. VA loan would be my first consideration, especially if you’re exempt from the funding fee and you’ll need to check with the department of veterans affairs to find that out.
If you are a first time buyer and short on cash,I’d consider a USDA loan..
If your credit score is on the lower side or your debt to income ratio is a bit high, then look into an FHA loan.
If you have really good credit, then a conventional loan, is probably the best option. even if your down payment is less than 20%, you’ll be able to eliminate the mortgage insurance at some point once you’ve paid the loan down equal to 20% of the home’s value. And like I said, a conventional loan could put you ahead of other offers if you find yourself in a bidding war for a home, which is pretty common in this market.
There’s more information about these loans on our website. there’s also a payment calculator. you just plug in the home price and the interest rate and it’ll figure your monthly payment. And there’s also a chart with current interest rates and that stays updated.
That address is meetmeinthepanhandle.com/mortgageresource
If you have questions or need some help determining your best options, give us a call or text. 304-264-2828