Fixed rate, ARM, DPA, bonds, FHA, Conventional, so many terms. For a first-time buyer, the amount of specialized words they encounter is overwhelming. What can be just as intimidating as the jargon is trying to decide which loan product works best for a home buyer’s unique buying situation. Every loan product exists because it is the perfect product, for someone.
VA Home Loans are offered through Veterans Affairs, and the loan product is only available to eligible veterans and their spouses. With no monthly mortgage insurance (PMI), VA is one of the best loans out there because it allows buyers to save money up front with $0 down, save money long term with a low monthly payment, and even allows for a seller to cover closing costs (up to 4% of the purchase price of the home).
USDA Loan Option
USDA is a loan focused on helping low-to-moderate income buyers purchase homes in rural areas throughout the US. The program does have both income and geographical restrictions but is available throughout most of the US. Like VA, the USDA loan program offers $0 down and very competitive interest rates for anyone with average or better credit.
Good Neighbor Next Door
If you live in a community that qualifies as a Housing and Urban Development Revitalization Area, you may qualify for a Good Neighbor Next Door loan. While not all that common, they assist emergency medical technicians, firefighters, law enforcement officers, and pre-kindergarten through high school teachers with their housing needs.
The key provision with a Good Neighbor Next Door loan is they offer a 50% discount off the list price for qualifying properties. A requirement is the stipulation you must live in the home for at least 3 years.
An FHA Mortgage is a government-insured mortgage loan and is one of the most popular options for first-time home buyers. Allowing buyers to purchase with as little as 3.5% down, FHA offers great rates on fixed and adjustable rate products and has a competitive PMI premium. With an FHA loan, a seller can contribute up to 6% of a purchase price to help with buyer closing costs, making the total buyer investment minimal.
Down Payment Assistance Loans & Products (DPAs)
In your search for a home, depending on where you live and who you are working with, down payment assistance (DPA) may be a term you hear. DPA comes in many shapes and sizes and attaches itself differently to different loan types, but the gist is this: You get financial help to cover your down payment, and (usually) you pay for it in other aspects of your transaction (for example, some DPA products will cover your down payment but require you accept a higher interest rate than would be available on a product with a down payment requirement).
Conventional loans have come a long way in the past couple of years. In today’s marketplace, a buyer can get a conventional loan with as little as 3% down, and if they have great credit, their mortgage and PMI rates will be very competitive. The nice benefit of a conventional loan over an FHA loan is that PMI on a conventional loan can be removed once a buyer accumulates 22% equity in their new home through paying down their loan balance or a combination of that plus home appreciation.
A conventional loan is a good option because unlike with government loans (VA, USDA, and FHA), there is no “Up front mortgage insurance premium”, a cost that boosts a buyer’s loan amount on government loans.
Preparing in advance of looking at homes is always your best bet. Assemble your team, get preapproved (not prequalified), and know your loan options ahead of time for an educated and excellent home buying experience!