How To Choose The Right Loan Type When Buying A Home
Posted on October 28, 2021
Did you know that part of maximizing your investments with your next home purchase is making sure you have the right financing to go with it? In this video, I’m going to walk you through the differences between four main loan types available for homebuyers. We’ll look at everything from your downpayment to qualifying credit scores so you can determine which one is best for you.
Deciding On A Loan
If you’re trying to choose a loan to buy a house, you’re probably confused. There are a lot of different loans available, and many people don’t know what’s the best deal for them. That’s where my strategy comes in.
Part of maximizing your real estate investment is matching up financing with your investment strategy based on your goals with this specific property. The lowest rate on the wrong mortgage strategy can cost you thousands of dollars in the long run. When shopping for a loan, many homebuyers make that mistake.
One of the things that you want to think about is how long you’re going to hold on to the property. Are you going to live in the house for 3 years, 5 years, or maybe 10 years? Do you want to rent out the place down the road? More importantly, how much do you have for a downpayment? What is your credit like? All of these questions have to be answered before you can determine which loan product is going to be best for you.
We’re going to learn about the different types of loan programs available so you can determine which one is best for you. If this is your first time buying a house, I’ll ease your confusion by breaking down the three loan types that are most used in today’s marketplace: FHA, conventional, VA, and USDA. Each of these types of loans come with their own pros and cons, so let’s jump in.
First, let’s talk about FHA loans. The FHA loan is for a person who is a first-time homebuyer looking to buy a home with little to no money down—even if they have challenged credit. It’s a government-backed loan that allows buyers to purchase a house with as little as 3.5% downpayment and a credit score as low as 580.
If you’re working with a qualified real estate agent, you can also negotiate with the seller to help cover the closing costs. This will reduce the amount of cash you have to pay out of pocket and is commonly done in our marketplace.
Some of the cons of this loan type include mortgage insurance. You will have mortgage insurance for the life of the loan for a 30-year mortgage, which means you could add hundreds of dollars to your monthly payment for the life of the loan. You may also have higher closing costs if you have a lower credit score. Also, if you’re buying anything with an HOA, it must be FHA-approved. Thankfully, though, we can help with that.
Now let’s talk about the conventional loan. In short, a conventional loan isn’t guaranteed by the government. Instead, it’s available and guaranteed through the private sector and private investors. Conventional loans account for a large portion of purchases and refinances in today’s marketplace.
While they do have advantages, conventional loans generally have stricter credit and income requirements than government loans do. However, they also accept a downpayment as low as 3%. To avoid paying private mortgage insurance on your commission, you will be required to put 20% down.
One of the things that you’ll want to do is weigh your options between a conventional loan and an FHA loan. If you’re going to choose a conventional loan, how much is that mortgage insurance going to cost you, and for how long? Is it worth going that route? Your answers can help you decide.
The next loan option we’ll talk about is the VA loan. These are loans that are specifically catered for our veterans and are an especially great product. It’s similar to the FHA but is created for veterans only.
The reason I like the VA loan over the FHA loan is that VA loans have 100% financing and no money down—while the FHA requires mortgage insurance. They’re both good loans but the VA loan wins. On top of that, the VA loan has no monthly mortgage insurance as the FHA loan does
Last but not least is the USDA loan. This is a 100% mortgage product that’s available for people purchasing a home in a rural area. It offers very low mortgage insurance and is a very cost-effective loan that you might want to consider as well.
USDA loans are fantastic for the East Texas market. Since most of our community is in a rural area, this is another great loan product for you to be able to plug into if you’re not a veteran and you don’t want to pay the higher cost of mortgage insurance with an FHA loan. USDA becomes a phenomenal choice for those buying in those qualified areas.
The main thing to know about USDA loans is that your property needs to qualify for it by being located in an eligible area.
Which Loan Will You Choose?
I hope this gave you a good idea of the four loan programs that are most common in our area. All of them are great and all of them have pros and cons. Some of them are going to be great for you and some of them aren’t. It’s for this reason that it’s important for you to work with a qualified mortgage lender to walk you through your options.
My team and I are fantastic and we would love to work with you. So if you have any questions about any of the loan programs or want to see what would be the best fit for you, feel free to reach out to me at (903)333-1089. Don’t forget to also subscribe to my channel so you never miss an episode of my show, all about making the best choices in real estate. Stay tuned to see what I feature next!