Mastering Mortgage Loans: Which Type is for You?
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Whether you are a first-time homebuyer looking to invest in your first rental property, or a seasoned- veteran on all-things real estate, it is important to understand the different types of mortgage loans in order to figure out which type fits your means and goals.
Most millennials shy away from buying a home in this day and age. The pre-conceived notion that they must have enough money for a 20% down payment can be a deterrent. It’s time we demystify the misconceptions and get down to the truth about what you really need to buy a home. It starts with Conventional versus Unconventional Loans.
Conventional Loans
So, what’s the difference? A conventional loan is a loan that is not backed by any sort of government program. These loans are offered by private lenders and have guidelines that are much stricter on factors such as credit score and debt-to-income ratio.
Conventional loans are either fixed-rate (where the interest remains constant during your entire mortgage) or adjustable-rate (where interest rates may be adjusted annually), and are commonly conforming loans, which means that they meet the standards for Frannie Mae and Freddie Mac to purchase the loan. But wait a second, who are Frannie and Freddie? They are the two largest investors of conventional loans, both of which are backed by the federal government.
Fast Facts on Conventional Loans:
A down payment of less than 20% on a conventional loan will require the borrower to pay private mortgage insurance.
“Low-down-payment” conventional loans allow down payments as low as 3%.
Conventional renovation loans allow a buyer to have the home price and renovation costs factored into one loan.
Conventional loans are riskier since the government does not back them.
Having this type of loan allows you to buy a home an occupy it as a primary or part-time resident as well as for a rental property.
If you are purchasing a rental property through a conventional loan, there is a minimum of 15-25% down payment depending on the type of property/number of units.
Unconventional Loans
An unconventional loan is a loan that is backed by the government or secured by a bank or private lender. They have guidelines that are more lenient on things like credit score and income, but generally have a lower loan limit. Buyers that are financing through an unconventional loan do need to verify that they will be occupying this home as their primary residence.
Fast Facts on Unconventional Loans:
FHA and VA loans are two of the most common types of unconventional loans.
FHA 203K Rehab Loans allow for the cost of the home and projected renovation costs to be combined into one loan.
Down payments can be as low as 0% on VA loans and 3.5% on FHA loans.
In most cases, a home that is purchased on an unconventional loan must be for the purpose of the buyer’s primary residence for at least one year before renting it out.
So, which type of loan is for you? It is important to ask yourself these three questions:
What does my current financial situation look like right now and how much do I have for a down payment?
What are my goals for the property that I am looking to buy (primary residence, rental, etc.)?
Where are interest rates at now and are they trending in a certain direction?