Ask Andrew- What loan program is best for me?
Written by: Andrew Goodman
Q: I am trying to decide which loan is best for me. There are so many loan programs out there, how do I choose?
A: Your lender and Realtor should be able to guide you through the process so you know which loan suits you best. This should be done prior to writing any offer on a property, as the contract/addenda will change depending on which type of loan is being obtained.
The most influencing factors in determining a loan is the amount the borrower has to put down and the borrowers credit score. The more you put down, the cheaper your monthly payment should be and the higher your credit score, the better the interest rate should be. However, there are some other items you should be aware of before deciding on the write mortgage.
Conventional: The conventional loan is the most commonly used loan. The reason being is that it tends to lead to a lower monthly obligation compared to the other loan types. A conventional loan product requires you to put at least 5% of the purchase price down as a down payment. There are some lenders out there that do have 100% financing options, however I tend not to recommend them, as the interest rate tends to be on the higher side (not to mention your credit score must be relatively high). Even if the mortgage interest rate is higher than some of the other loan products, if the borrower has a good credit score, a conventional loan could have a lower associated monthly obligation because their private mortgage insurance (PMI) could be at a cheaper rate. There are 2 types of mortgage insurers, government (MI) and private (PMI). I always recommend borrowers to put down at least 20% of the purchase price when purchasing a property because the borrower will avoid paying mortgage insurance. A mortgage insurance policy protects your lender in case a buyer defaults on the payments. Mortgage Insurance is a monthly (or upfront) fee charged to the borrower for any loan greater than 80% LTV (Loan To Value). FHA: A FHA loan is great for buyers who do not have a large down payment. A borrower can put down as little as 3.5% to obtain this type of loan. The down side to this loan is that the Mortgage Insurance, insured by the government, is at a set rate no matter the credit score. So, if the borrower had a good/high credit score, the mortgage insurance rate could be lower with a conventional loan product than a FHA loan. This program also causes some issues if the borrower is trying to purchase a condominium. If that is the case, the condo complex must be FHA approved. The condo complex approval process deals with the finances and warranties of the condos. In our area, there are many buildings that are/were FHA approved, however several building’s FHA approval has since expired and the management company/condo association hasn’t put the work in to have it reapproved.
VA: A VA loan is for military personnel who are trying to purchase a home and don’t necessarily have a large down payment or a down payment at all. This loan allows folks who are in or were in the military to obtain a 100% loan, not requiring any down payment. With a VA loan, there is no mortgage insurance however there is a funding fee. The funding fee will vary depending on the borrowers military standing. Like the FHA loan, if a VA borrower is trying to purchase a condominium, the condo complex must be VA approved. This does limit the condo inventory, as many complexes have not spent the time to have the complex VA approved.
If you remember, during the “bubble,” many borrowers were obtaining 100% financing, but this was structured quite differently to avoid the borrower paying mortgage insurance. Second trusts, not nearly as common today however still available; allow the borrower to obtain a first trust for 80% LTV and then a second trust for the remaining 20%. Today, second trusts vary and do come with a typically high interest rates. I have seen second trusts available today for 10% LTV so the borrower would be able obtain a 80% first trust, a 10% second trust, and only have to put down 10%. Unfortunately, I have not seen a 20% second trust available today. Be sure to keep a track on your balance of the loan because as you get to 80% LTV you may be able to remove your MI, however FHA loans typically require PMI for the life of the loan.
Lenders come up with different programs on a daily basis. Loan standards also change quite often. Please speaking with a lender and your Realtor to determine which program is best for you.