Types of Home Loans: Conventional, VA, or FHA Financing?

Posted by Lee and Katherine Keadle on Friday, April 26th, 2013 at 3:17pm.

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Which type of loan should you get? Purchasing a home is one of the single biggest investments most people make, so it’s a good idea to research the best ways to pay for your home. There are three main types of loans to consider: FHA (Federal Housing Administration), VA (Veterans Administration), and conventional. FHA and VA loans are government backed, which means that if the buyer defaults, the government will ensure full payment to the lender. Conventional loans are not backed by the government and usually encompass any loan that is not an FHA or a VA loan.

VA loans can only be obtained by veterans and active military personnel. People who qualify for VA loans are not restricted to using a VA loan, but many who qualify choose to go the VA route because it offers good options and benefits. VA loans are normally best for buyers who want 100% financing (or a zero-down mortgage), no monthly mortgage insurance premium (also called PMI), or lower origination fees and closing costs. In the Charleston real estate market, we see many VA loans due to the Charleston Air Force Base and the Naval Weapons Station in our area.

FHA loans have become more and more popular over the past year or two. Often, these buyers are not eligible for a conventional loan due to their income or credit score. It is much easier to get approved for an FHA loan with a lower down payment (3.5%) than it is for a conventional type loan. Down payments can be a gift from a family member, some non-profit agencies, or a government agency. The downside to using these gifts is that the loan amount limits tend to be less than conventional loans allow. FHA has private mortgage insurance that cannot be dropped for 5 years compared to conventional PMI that can be dropped at any point you can prove to the bank that you have 20% equity in the property. FHA loans are often great products for first time homebuyers in Charleston who don’t have a lot of cash to put into a house or for buyers needing cash to make updates/improvements to a home at the top of their price range.

Mortgages that are not FHA or VA are called conventional home loans. Fixed rate, adjustable rate, jumbo (loan amounts over $417K), and combination loans (such as an 80% first mortgage, 15% second mortgage) are all categorized as conventional loans. Buyers who choose this loan type have a good credit score and a lower debt-to-income ratio. Usually, they want to borrow more than VA or FHA allows, and they can afford at least a 5% down payment. Conventional loans have fewer loan restrictions than FHA or VA. Most conventional types require PMI, unless the borrower puts 20% or more down. This loan type is by far the most popular in Charleston, and is ideal for people who have good credit and some money saved up for a down payment.

By shopping around for the best rates and services, you can save thousands of dollars. In order to make sure you are comparing apples to apples, make sure to ask for a GFE (Good Faith Estimate of closing costs) in order to see all fees associated with the loan. Some loans promise a very low rate, but then charge the client enormous closing costs to make up for the great deal on the rate – that’s why it’s important to see all costs and fees upfront. Talking to trusted professionals such as your real agent and also getting referrals from friends and family will help get you on the right track. Getting pre-qualified for your loan takes only about 15 minutes and is free of charge. It is important to know how much you can afford prior to shopping for a home, especially in our fast moving Charleston real estate market. Providing a pre-qualification letter in with your offer to purchase can improve your negotiating power, especially in the multiple offer situations that are becoming more common in our market.

If you’re considering purchasing a home in Charleston, talk with your circle of friends, family, and trusted professionals to get names of a few loan officers in your area. Compare Good Faith Estimates to get the best rate and loan product for your money. If you or your spouse has been (or currently serves) in the military, talk to your loan officer about your VA eligibility. If you are a first time homebuyer, or if can’t put 5% down on your new home, ask about your eligibility with regards to an FHA loan. Otherwise, a conventional loan is probably your best option, as long as you qualify with your income and credit history.

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