Buying a home isn’t necessarily difficult—but figuring out your financing can be. Navigating the loan process can be confusing, and you may be having trouble deciding what type is right for your needs. To make sure you choose the right loan for you, I’m going to break down the two main loan types and outline exactly what they mean for you.
The two main loan types are agency and government. Each of these loan products are standardized, and both have their own set of pros and cons.
QUICK MORTGAGE TIP: All of these credit guidelines are the same, regardless of what bank, credit union or mortgage professional you talk to.
Yes, that’s right: the guidelines are the same no matter what. When choosing who you should use for your mortgage, it’s not the bank or lending institution they work for that matters—rather, it’s the person themselves that will be your best ally to get you to the finish line of your home buying experience.
Loan Type #1: Agency Loans
Agency loans are often referred to as conventional or conforming loans, and they’re the best bet for consumers—as long as you qualify. You’ll need a credit score of 700 or higher and be able to put a minimum of 5% down to ensure you qualify for this type of loan, with terms ranging from 10, 15, 20, 25 and 30 years. Your conventional loan will typically allow you to get the best interest rate, lowest borrowing cost, and best overall mortgage product. The only con with this type of loan is that you may have trouble qualifying for it.
Loan Type #2: Government Loans
Sometimes called Govvies, these include FHA and VA loans; both are government-backed, and are catered to borrowers with lower credit scores who can’t afford larger down payments.
FHA loans are a great option for first-time homebuyers, as only 3.5% down is needed. While this might seem like a win-win situation, there are some major cons you’ll want to be aware of. In the end, the total cost to acquire your mortgage through an FHA loan will be higher: closing costs will be more expensive, and you’ll be charged an upfront mortgage insurance premium just to secure your deal.
QUICK MORTGAGE TIP: This charge is the same regardless of what bank or credit union you use for your mortgage.
If you hear about an amazing offer or too-good-to-be-true deal on an FHA loan, you’ll realize it’s all the same once you sift through the crap. Don’t be fooled into thinking you can get around these fees!
Another con to FHA loans is that mortgage insurance will be required on a monthly basis for the full life of the loan. This means that even if you had 20% equity, you’d still have to pay for mortgage insurance.
Key Takeaway: An FHA loan is a short-term, band-aid style loan to help you acquire your property; once you qualify for a conventional loan, you’ll need to refinance.
VA loans are another type of government loan, and they provide an exceptional product for both current and retired service members. Similar to an FHA loan, VA loans are strictly catered to American veterans only and often don’t even require money down. As an added benefit, monthly mortgage insurance is NOT required even if you put no money down; this can save you hundreds of dollars a month. Just recently, VA loans have been adjusted to remove caps and limits to how much money a veteran can borrow.
While there are many amazing pros to VA loans, there is one potential con: you may need to pay a funding fee to the VA to utilize your benefits, depending on the terms outlined in your certificate of eligibility.
Overall, VA loans are an amazing product and are a fantastic way to thank you for your service.
To Recap: These are the two main types of loans available in the marketplace—but there way more loan products available outside of the agency space!
Some of these other loan types include doctor loans, jumbo loans, self-employed borrower loans, bank statement programs, debt service coverage and many more. If you have questions, we’d be happy to discuss your options with you.
QUICK MORTGAGE TIP: Each and every type of loan will have its pros and cons, but there is an underlying theme: the better qualified you are, the better terms you’ll get.
No matter where you are in your home buying journey, it’s never too early to start the mortgage finance process. The more prepared you are and the better serviced you are by your mortgage lender, the more money you’ll save overall in the home buying process. You should work with someone you trust, and we’re here to welcome you with open arms whenever you’re ready to start your mortgage journey.
Now that you understand everything about loan types, go ahead and move on to the next lesson!