Different Types of Loans

Once you have decided on becoming a homeowner, you first have to figure out how you are going to finance the house. There are many different types of loans available in the market today. Knowing your options will help you to make the best decision that best fits your financial needs.
This article lists some of the most common types of loans for home buyers. 

FHA

The Federal Housing Administration (FHA) was established in 1934 to improve the construction and financing of housing.  FHA insures loans.  In the event of foreclosure, the lender is protected by the FHA mortgage insurance that covers the full amount of the loan.  This encourages lenders to make new mortgages without having to worry about not being repaid.
But the security comes at a cost.  FHA requires the buyer to pay an upfront premium (UFMIP) amount of 1.75 percent at closing, regardless of down payment.  FHA will also charge monthly mortgage insurance payment (MIP) based on the initial loan-to-value ratio and length of the mortgage.
Buyers can get FHA loan with a down payment as low as 3.5 percent.  For you to qualify for an FHA loan, you need to have a FICO score of 580 or more.  Having a score lower than 580 will require you to make higher down payment.
FHA loans are limited to owner-occupied properties.  It can include some multi-unit properties if at least one borrower must occupy the property and sign.

VA

A lender makes VA loans.  VA’s guarantees the loans made by the lenders to protect them against the loss if the borrowers aren’t able to make the payment.  It encourages lenders to offer veterans with favorable terms.  VA loan is available to military veterans and active military members.  Spouses of a veteran who died while on active duty may also apply.
VA loans do not require down payments, and there is no requirement for mortgage insurance.  However, all veterans using the VA Home Loan must pay a funding fee.  This fee is used to ensure the VA program to continue for future generations.  The funding fee is a percentage of the loan amount.  The funding fee can be paid in cash upfront by the borrower or the seller, or it can be financed into the loan amount.
A veteran obtaining a VA-guaranteed loan needs to certify that he or she intends to occupy the home personally.  Eligible veterans may get loans to buy an existing home, build a home, or simultaneously purchase and improve a home.

USDA

USDA loans are available to eligible applicants in rural areas.  The Rural Housing Service (RHS) is an agency of the United States Department of Agriculture (USDA).  It was created to improve the quality of life in rural areas.  RHS guarantees a loan made by a commercial lender by encouraging them to make loans to rural residents.
USDA loans usually do not require down payment.  If the loan amount exceeds the appraised value, borrower required to pay the Guarantee Rural Housing fee.
The applicant must be able to personally occupy the home.

Conventional Loan

In short, a conventional loan is a mortgage that is not guaranteed or insured by the government.  In this type of loan, the lender assumes all the risk of being paid back.  For that reason, obtaining a conventional loan requires higher qualification standard and requires you to pay higher down payments.  When a borrower makes a down payment amount of less than 20% of the home’s purchase price, a lender usually requires a PMI.
PMI (Private Mortgage Insurance) is a type of mortgage insurance that might be required when you are obtaining a conventional loan.  The PMI protects the lender in a case where the borrower is unable to pay back the loan amount.  While there are several different options for PMI to be paid, the most common way is to pay it through a monthly premium.

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