- FHA Loans
- VA Loans
- Conventional Loans
- Cash
I wouldn't advise on option 4 unless you were purchasing investment properties. If you have that kind of liquidity real estate is a great investment with good returns, but that is a blog for another day.
Let's break down the other three.
FHA Loans are insured by the Federal Housing Administration and are popular because of low down payments, low closing costs, and easier credit qualifying. You can put as little as 3.5% down towards the purchase of your new home. FHA backed loans don't come free. You have to pay 1% of your loan amount at closing, a mortgage insurance premium (MIP), to obtain mortgage insurance from the FHA. You also have monthly premiums as well.
If you haven't been paying attention to the news, on April 1, 2013, these premiums have increased and are now required to be paid beyond a 80% loan-to-value (LTV), whereas before, you only paid them until you reached a certain LTV ratio. I'm sure you can see how expensive this type of loan has now become. The new rates are below:
- 15-year loan term, LTV greater than 78 percent, less than 90 percent: 0.45% annually
- 15-year loan term, LTV greater than 90 percent: 0.70% annually
- 30-year loan term, LTV less than, or equal to, 95 percent: 1.30% annually
- 30-year loan term, LTV greater than 95 percent: 1.35% annually
On June 3, 2013, the FHA is going to to make these additional changes:
- 15-year loan terms with a LTV less than, or equal to, 78 percent will be assessed a 0.45% annual MIP
- FHA mortgage insurance premiums will not cancel for loans with a starting LTV exceeding 90%
- FHA mortgage insurance premiums must be paid for a minimum of 11 years for loans with a starting LTV of 90% or less
This isn't the first time that changes have been made to the program but if you are curious about the underlying causes you can get more information at Biz Journals - FHA Loan Changes.
VA Loans are a benefit to active duty service members, veterans, and National Guard and Reserve members. These loans require little to no money down and do not require a private mortgage insurance (PMI) since they are guaranteed. There are requirements to meet to qualify for these types of loans including but not limited to: length of service, credit score, and income. There are many programs out there for the heroes who are serving and have served our nation. You can visit VA Home Loan Benefits for more details.
Finally, conventional loans. A conventional loan is a mortgage that is not guaranteed or insured by any government agency. They are typically made by institutional lenders such as banks, credit unions, pensions, etc. Lenders have many different programs, some which require you to put as little as 5% down and others as much as 25% down. Depending on the guidelines, you might not have to pay any PMI on your loan as long as you put at least 20% down. This might be a larger cash requirement upfront but can save you hundreds and thousands in the long run. The upfront cash is equity in your home so you will get it back when you sell your home or if you need to pull money out in a refi.
Lenders have become quite annoying with all the requirements needed for getting a loan these days. It is not as easy as it once used to be. Money is coming cheap right now but it does not come easy. To help make the process more seamless make sure you are working with a good lender. Communication is the biggest factor here. Find a lender that is easy to get a hold of, not one you are trying to chase down the day before closing.
I have closed on a few investment properties and refinanced my personal home all within the past 8 months and I can't begin to tell you how annoying the process was. It wasn't really anyone's fault just the system. All I can say is, make sure you provide your lender with all the information requested and be prepared for their underwriters to come back and ask you for more.
If you are looking for a good lender or would like to shop rates, reach out to me and I can send you to a few of my close contacts.
I'll leave you with a simple payment equation:
Total Monthly Payment = Principle + Interest + Taxes + Home Insurance + (PMI or MIP)
Cheers!
Bina S Beechum
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