Fri. Feb 21st, 2020

Different Types of Loans

3 min read

There are many different types of loans available but not as many as there had been in the past. In the wild west of loans during the mid 2000′s, you could get a loan just for being alive. This led to the catastrophic collapse of the lending industry and the historic amount of foreclosures that almost brought down the economy. Today’s lending options make much more sense, so let’s jump into them.

Your opportunity to get a home loan is going to be based primarily on these criteria: credit score and debt to income ratio and secondarily, length of time on the job and the amount of money you have to work with. That’s it!

Credit score and savings available dictate what kind of a loan you are most likely to be successful in securing. Below is a list of the different types of loans available to you and what the advantages and disadvantages are to each.

Veterans loan (VA). The loan is available to all people who have served in the US military and successfully attained a good discharge. This is a government-backed loan. The advantages are:

  1. You are eligible for a loan up to $471,000, of course limited by what you qualify for.
  2. You are not required to have a down-payment.
  3. The seller can pay your closing costs and pre-paids which means you can get into a home regardless of the sale price for as little as $500.
  4. There is no pre-payment penalty.
  5. There is no mortgage insurance with the loan.

The disadvantages are: none. If you are a vet, don’t be stupid…Use your entitlement!

FHA loan: The loan is eligible for anyone including veterans if they so choose. This is a government-backed loan. The advantages are:

  1. Has the most lenient of all loans in terms of credit scores.
  2. Requires the least amount of money down (3.5%) with the exception of VA loans.
  3. Has a sale price limit of $271,000.
  4. Is the cheapest type of loan to refinance.
  5. There is no pre-payment penalty.

The disadvantages are:

    1. Requires you to refinance the loan into a different type to remove the mortgage insurance.
    2. Requires the home to meet a minimum standard for occupancy before the loan closes.
    3. Requires mortgage insurance regardless of the amount you put down.

Conventional Loan: There are many different types of conventional loans. They are privately insured loans not government-backed. The types range from fixed to balloon to adjustable to whatever. They may be for 1year, 3year, 5year, 10year, 15year, 20 years or 30 years. For a better understanding (click on Different Loan Types).The advantages are:

  1. There is no limit to the amount of money you can borrow, as long as you qualify for it.
  2. There are no minimum standards for occupancy.
  3. There is no pre-payment penalty.
  4. Mortgage insurance is not required if you put 20% or more down.

The disadvantages are:

    1. They require the largest amount of down payment: usually 10% or more.
    2. They require the highest minimum credit scores: usually 640 or above.
    3. They require the highest amount of mortgage insurance for the same amount borrowed.

Before you choose which loan is best for you, you should consult with your REALTOR®, lender (more than one), and get good faith estimates from all lenders under consideration. A Good Faith Estimate (GFE) is a list of all the charges the lender is going to charge you for the amount of money you are going to borrow and the interest rate you are assigned for that amount of money.

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