For those who are in the process of buying a home or those who are considering such, there is a confusing array of options. The government offers a few different home loans, but all of them come with strings attached. The private option tends to have fewer of those but is also much more difficult to obtain. Today, we will attempt to educate you regarding the differences and similarities between three popular types of home loan.
How Does A Conventional Loan Work?
Conventional loans are obtained through a private institution such as a bank. They are not backed by the government or by any other entity. This means that you are completely on your own in some regards. Still, conventional loans tend to be cheaper on insurance costs.
Without any backing, your financial institution is going to be a lot more suspicious and a lot more choosy about who they will approve. They will almost certainly insist that you obtain mortgage insurance so that their investment will be better-protected. That being said, you will also be dealing with fewer government regulations.
Conventional mortgage loans are not bad, but you need some capital before you can attempt to make use of them. Those who get conventional loans tend to make larger down payments and tend to pay off their debt more quickly. This is no surprise since you have to be financially secure to get approved in the first place.
The main downside to a traditional mortgage is the lack of any kind of safety net. When we say “safety net,” we are referring to measures that are meant to help a borrower if they should happen to default. If you fall into default on this one, don’t expect any sympathy from your lender.
How Does An FHA Loan Work?
The FHA loan was created during the great depression as a way to boost flagging homeownership rates. Due to the extreme poverty of the time, private home ownership was at an all-time low. To save the already-bloodied market from the consequences of this problem, the government created the Federal Housing Authority and gave them the ability to hand out special loans and grants.
FHA loans are meant for people who may not have the best credit in the world, but who still want to own a home. They allow both fixed and variable insurance rates and are normally extended with a 15-30 year term. This is pretty generous, as it gives you plenty of time to repay the loan.
There are several different types of FHA loan, which gives you a little more flexibility. Other advantages of an FHA loan include low down payments, low closing costs, and generous repayment terms. All in all, you couldn’t ask for a better option if you are a first-time home buyer.
How Does A VA Loan Work?
VA loans are government-backed loans that are intended to reward members of the military for their service. Naturally, those who were dishonorably discharged will not be eligible. This loan is backed by the federal government, and there are a lot of safeguards against foreclosure.
This kind of loan usually requires no down payment, although it might vary somewhat between lenders. Another good thing is that you are not required to buy mortgage insurance with this kind of loan. Obviously, this is due to the fact that Uncle Sam has agreed to pay if you default.
One of the only bad points about a VA loan is the fact that you will have to pay one extra cost. Referred to as a “funding fee,” this extra charge is not small and is used to help fund the continuing efforts of the VA. Most would probably call this a good cause that is well worth the extra money.
VA loans also tend to have a low-interest rate since the company has very little risk. As such, monthly payments tend to be rather low with this kind of loan. Of course, it should be noted that the government isn’t taking all the risk off your hands. In most cases, they will only pay 25% of the principal if you should happen to go into default.
How Do I Know Which One Is Right For Me?
When considering which of these loans to get, you should think about who you are and what you need. Let’s start with the VA loan since it is the easiest to discount. If you are a military veteran, you should probably go with the VA loan because its terms are so favorable. If you are not a military veteran, current service member, or a designated surviving relative, you won’t have this option.
That brings us to the FHA loan. This is a great choice for those who lack the experience and the capital to jump into a conventional mortgage loan. However, unlike USDA loans, FHA loans do not have a maximum income or a minimum income needed to qualify. This means that you don’t have to low on money or experience to make good use of the FHA loan. Also, the lack of any down payment is really great. If you’re not a veteran, and you don’t have much money, you should try to qualify for this one.
The conventional option is the best in some ways because it tends to be the simplest. With a conventional loan, your obligations tend to be straightforward and predictable. Because of the fact that no one is financing you, the lender will be in less of a position to impose strange rules. However, they will definitely be a lot more likely to turn you down.
In this matter, there is no one right answer that works for everyone. All three of these loans were created for entirely different purposes and entirely different types of people, and the rules reflect those origins. The FHA was originally meant to help impoverished Americans. The VA is meant to help veterans. Private banks are simply trying to make money as they always have.
Thankfully, you are unlikely to have your choice of all three of these loans. This makes the decision much easier. We hope that this article has been both helpful and enlightening. We also hope that you will be able to make an informed and rational decision about your financial future. Please feel free to fill out the contact form below so that we can bring you more content like this.