Whether you are a first time buyer or a move-up buyer, it is important to know the differences between the basic loan programs out there. Each type of loan program has a myriad of products that derive from it, but here are the 3 main loan types that the market has to offer:
- Conventional Loans
- FHA Loans
- VA Loans
Conventional Loans: This is the most common loan in the market. Until recent years, most loans were originated as conventional. They offer low rates, great pricing and the ability to get rid of mortgage insurance in some cases. This loan product is great for buyers that have saved up a sizable down payment on their home and have some reserves in the bank.
Pros:
- Great loans when putting large down payments (10% or more)
- Great loans when you have high credit scores
- Best loan option (lowest monthly payment) with 20% down payment and good credit score
Cons:
- Low credit score is heavily penalized with points (1 point = 1% of your loan amount due at closing)
- Less than 20% down payment can incur in mortgage insurance, higher rates, or both
- Qualifying guidelines can be more strict than other programs
FHA Loans: FHA loan is a Federal Housing Administration mortgage insurance backed mortgage loan. Over the past 4 years, they have had a tremendous increase in popularity do to its low down payment requirements and more lax qualifying guidelines. This loan program is the choice of most first time buyers. You do not have to be a first time buyer to get an FHA loan.
Pros:
- Low down payment (3.5% of the sales price)
- Low penalty points for low credit scores
- Qualifying guidelines are more relaxed than conventional loans
Cons:
- Mortgage insurance is always requires despite down payment for a minimum of 5 years
- Only 1 FHA loan can be active on a social security number at any given time with rare exceptions
- Upfront mortgage insurance premium of 1% payable to FHA collected at time of closing (higher closing costs)
VA Loans: VA loans are mortgage loans guaranteed by the Department of Veteran affairs. Its aim is to provide financing to eligible veterans featuring low rates, 0 down payment and no mortgage insurance.
Pros:
- 0 down payment option (100% financing)
- Low penalty points for low credit scores
- No monthly mortgage insurance (this is the feature that makes it the most attractive)
Cons:
- Upfront VA Funding fee (payable to VA at time of closing, making closing costs higher)
- Only Veterans are eligible for this program
- Strict maximum mortgage guidelines on high cost areas such as DC, MD and Northern VA
- As of January 1, 2011 and through September 30, 2011, a Veteran with full entitlement may borrow up to the 2011 VA limit which is $818,750 for the following Northern Virginia Counties:
- Alexandria
- Arlington
- Fairfax
- Fairfax City
- Falls Church
- Manassas (City)
- Prince William County
- As of January 1, 2011 and through September 30, 2011, a Veteran with full entitlement may borrow up to the 2011 VA limit which is $818,750 for the following Northern Virginia Counties:
Information provided by Sebastian Rivera, Potomac Mortgage Group, LLC
