Quick Guide to Loan Types
Let us start off with the basics. A loan to purchase property is called a mortgage. The property becomes collateral and can be taken back by the bank (foreclosure) if the payments are not made. The lender will charge interest (as of today are around 4.6%)[i] This is how the lender makes a profit on your loan.
A lender may also offer you points. Points are a one-time fee paid up front to reduce the interest rate on a loan. You pay a certain amount per point (a point is equal to 1 percent of the loan). So 1 point on a $100k loan is $1k.
Here are the main types of loans:
Fixed Rate Loan - The most common type of loan, a fixed-rate loan, has a single interest rate—and monthly payment—for the life of the loan, which is typically 15 or 30 years.
Right for: These loans are good if you want to have the same payment every month. Any change in the interest rates will not effect your payment. Homeowners who crave predictability and aren't going anywhere soon. It is a good option people that plan on being in that particular home for a while.
Adjustable Rate Loan – adjustable rate (also called “ARM”) has an interest rate than can change (sometimes as often as every month). The beginning interest rate is often lower than a fixed rate loan (called a “teaser rate”). This makes it more attractive to some home buyers, especially those with less than perfect credit.
Right for: people that do not want to remain in the home for long. They can move or refinance before the rates increase. Often people qualify for the teaser rate and hope the rate will not go up, only to lose their house when it does. They cannot make the payment at the higher rate because they are stretched to thin financially.
FHA Loan – Federal program that guarantees loans made by banks to you. The government ensures that the banks will get their money should you, the home buyer, default on the loan. FHA loan require that you can put down as little as 3.5% (rather that the 20% banks require).
Right for: Home buyers who cannot come up with enough cash for the down payment. These loans come with several caveats. First, most loans are limited to $679,650. Interest rates are typically fixed, with either 15- or 30-year terms.
FHA loans also have lower requirements for credit scores. This is great for those who cannot qualify for a loan through more traditional lenders. Some FHA loans can be had with a credit score as low as 580. Most traditional lenders need a score of 650 plus.
FHA loans also provide for those with higher debt to income rations (43% rather than the traditional lenders 36%). Debt to income ration is calculated by adding up all of your monthly debt payments and dividing them by your monthly income. The higher the percent, the less income you have to put toward payments on your new home.
Buyers are also required to pay —either upfront or over the life of the loan—which hovers around 1% of the cost of your loan. This insurance compensates a lender should you default on the loan.
You will also have to get an appraisal done by a FHA approved appraiser. If the value the appraiser comes up with is lower than what the seller wants, you may have to cover the difference or lose your bid on that particular property.
VA Loan – this is a loan that veterans of the military can obtain (if they meet eligibility requirements).
They require no down payment and no mortgage insurance. They do require an appraisal and can have the same issue as FHA loans. Appraisal too low you may need to make up the difference.
Recently qualified vets could borrow up to $450k. They also are more tolerable of lower credit scores and may offer slightly lower interest rates.[ii] A drawback is they charge a percentage of the loan (up to 3%) as a funding fee to cover their operating costs.
USDA Loan - USDA Rural Development loans are designed for families in rural areas. The government finances 100% of the home price. This means you do not need to come up with a down payment. They also offer discounted interest rates to boot.
Right for: Families in rural areas who are struggling financially. These loans are designed to put homeownership in their grasp. The catch? Your by more than 41%, and, like the FHA loan, you will be required to purchase mortgage insurance.
Also, you are limited to some of the more “rural” areas of your county. So if city living is your desire, you may be out of luck. Another draw back is a mortgage insurance requirement and income limits.
The following are some thoughts from my good friend Natasha Dykes of Mortgage Financial, located at 2801 S Bay St, Eustis, FL 32726.
In regards to programs that can help first time home buyers, the following is a synopsis of what we can do:
- USDA – this is a really good program because it does offer 100% financing, and can also possibly include some closing costs, but the home has to appraise for more than the sales price in order to include any closing costs. If the seller is willing to contribute funds for closing they have a limit between 4% to 6%. Also, this loan does have private mortgage insurance (PMI) added to the payment, but the PMI rate is lower than the rest of the loan programs which have more than 80% being financed. The USDA program does have restrictions though which include the area in which they will lend (example - most of Grand Island and Umatilla are acceptable), but it will be important for me to get the address and look up to determine the buyers interested property for sure. Also, the program has income limitations (example - Lake County is approximately $82,700 for a 1 to 4 person home).
- FHA – this program offers 96.5% financing, so the borrower only needs to have the 3.5% down payment plus closing costs. As with the USDA program the seller can contribute closing costs between 4% to 6%, but the down payment has to be from the borrower’s own funds. Also, as with the USDA program, this loan program will include a private mortgage insurance (PMI)
- Lake County SHIP – this program offers assistance from the State to help buyers with closing costs and down payment. The buyers would need to go thru the program process directly with Lake County then they actually do a grant when it comes time to do a loan for a home the buyer wants to purchase. There are restrictions, income limits and fund assistance limits but the Lake County SHIP program decides these facts. The phone number in which the buyer can reach the county is (352) 742-6530 and the following is link to their website: https://www.lakecountyfl.gov/departments/community_services/housing_and_community_development/home_ownership_assistance.aspx
As with all loan programs, there are different credit, debt to income, loan to value and type of home guidelines. These guidelines can vary depending on the situation so let me know if you have a specific question I can help you or your buyers with 😊
This was meant to give a basic overview of loan types. There are other types of loans not listed here. I am not a loan officer, nor do I work for a bank or mortgage company. Please accept this as informative only and contact your particular lender for more information.
Zully Passalacqua/ Realtor®