Types of Loans
Buyers can easily get overwhelmed by the options they are confronted with when it is time to apply for a loan. Conventional? Government-backed? Fixed rate? Adjustable rate? Even within these categories and with individual lenders there can be several options. There can be lots of options and that is great for you! It means you can likely find a loan that fits your needs.
Here are a few general categories to get started:
Fixed rate Mortage
Fixed rate mortgages are exactly that – the mortgage rate remains fixed for the life of the loan. Monthly payments are fixed for the principal and interest. If property taxes and homeowners insurance are paid as part of your payment, these are paid through an “escrow” account which can fluctuate from year to year.
Adjustable Rate Mortgage
This type of loan has the potential to have monthly payments that change since the interest rate can change. There is usually an initial period of time where the interest rate does not adjust. How often the interest rate adjusts will also depend on the loan. Since interest rates do change over time, the payment can either be higher or lower depending on the difference in the interest rate.
When considering the type of loan that is right for you, I encourage you to think of your future plans. Planning on moving in fewer than five years? You might save money to use an adjustable rate mortgage with the expectation that you will be moving and taking out a new loan before the interest rate is adjusted. However, what happens if there is a health issue or something else which prohibits you from moving in five years? What if you cannot move into a fixed-rate mortgage? Use some “what if” scenarios with your lender to determine the best fit for your needs.
Mortgages may also be either “conventional” (meaning funded by the private sector – usually a bank) or a “government-backed” loan. Government-backed loans are backed by the federal government, including the Department of Veteran Affairs or the Department of Housing and Urban Development. The government agency is “insuring” the loan, although the funding may still be by a bank. The Department of Housing and Urban Development typically has less-stringent lending qualifications, making it easier for some buyers to get a loan. For example, at the time of this writing, the down payment on an FHA loan (by the Federal Housing Administration) can be as low as 3.5% as opposed to a private loan which require 10-20%.
Below are the most-typical types of government loans:
FHA (Federal Housing Administration) Loan
The three benefits of this loan are low down payment, lower credit score requirements, and additional monies to fix the home up can be included in the loan amount. Buyers who want to take advantage of an FHA loan first need to find an FHA-approved lender. I have a full list of our local FHA-approved lenders in the event that type of loan sound like a good match for your needs.
Once the buyer finds a home and makes an offer, FHA will require an inspection of the property the buyer has made an offer on. There is a minimum list of requirements the property must meet in order for FHA to back the loan.
The drawback to an FHA loan? Government mortgage insurance is an additional expense you will need to cover.
These are managed by the Department of Veteran Affairs and are reserved for military service members. The benefit of a VA loan is it does not require a down payment. If you are a military service member, an agent can help you find a property, but when it comes time to apply for the loan, your Veterans Administration office will point you in the right direction and help you with the application process.
These loans are managed by the United States Department of Agriculture and are reserved for rural areas. They are available to low-income residents. Essentially, all of Whidbey Island is in an eligible area so it is just up to the buyer to meet the income eligibility requirement.
If you are thinking about buying a home in the near future, let me set up a meeting with a lender who can guide you through the ins and outs of each, and help you determine the best loan for your needs and comfort level.