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*Understanding loans is a basic summary of loan types/programs and should not be considered legal or financial advice. Consult a lender or attorney when making loan decisions.
VA (Veteran Affairs) Loan
The VA Home Loan Program started in 1944 as World War II came to an end. The overall objective of this program is to extend relief to those who have or are serving in the Armed Forces and diminish possible economic and sociological problems of post war readjustments. The most important element of the VA Loan program is that home loans are guaranteed by the Government.
When purchasing a home, Credit is a crucial factor. Those who serve in the Armed Forces often miss the opportunity to establish a credit rating which could be the basis of borrowing to acquire a home or to establish a business. To enable Veterans the opportunity of acquiring loans, the Government guarantees VA Home Loans which yield many benefits to Veterans that employ this program.
FHA (Federal Housing Administration)
An FHA loan is a home loan that is insured by the FHA.
In other words, the offers a guarantee to your bank: if you fail to repay the mortgage, FHA will step up and repay the bank instead. Because of this guarantee, lenders are willing to make large mortgage loans in cases when they’d otherwise be unwilling approve loan applications The FHA, an agency of the United States government, has plenty of dough to deliver on that promise.
BREAKING DOWN 'FHA Loans'
FHA loans were introduced after the Great Depression in the 1930s. During this time, defaults and foreclosures skyrocketed. In response, the government created federally insured loans that gave
mortgage lenders peace of mind, reduced lender risk, and stimulated the housing market. By insuring mortgages, lenders were (and still are) more inclined to issue large mortgages in cases where they normally would not have approved the loan application.
Who are FHA Loans for?
FHA loans are offered to low-income individuals who have credit scores as low as 500. Individuals with a credit score between 500-579 can obtain an FHA loan with a down payment of 10%; individuals with a credit score higher than 580 can get an FHA loan with as little as 3.5% down. The Federal Housing Administration does not lend the borrower the money to take on a mortgage or to buy the house. Rather, the borrower pays a monthly or annual mortgage insurance premium to the FHA to insure the loan which the lending institution issues to him or her. In case of default, the lender’s financial risk is minimized since the FHA would step in to cover the payments.
Having no credit history is not a problem with an FHA loan. Instead of your credit report, the lender may look at other payment-history records, such as utility and rent payments.
Even people who have gone through bankruptcy and foreclosure may still qualify for an FHA loan. However, the lower the credit score and the lower the down payment, the higher the interest rate.
In addition to the traditional first mortgages, the FHA offers a reverse mortgage program known as Home Equity Conversion Mortgage (HECM). This program helps seniors convert the equity in their homes to cash while retaining the titles to their homes. FHA also offers a special product known as an FHA 203(k) loan, which factors in the cost of certain repairs and renovations into the loan. This one loan allows an individual to borrow money for both a home purchase and home improvement. That can make a big difference for a borrower who does not have a lot of cash on hand after making the down payment. The FHA’s Energy Efficient Mortgage program is a similar concept, but aimed at upgrades that lower the utility bill. The cost of newer, more efficient appliances, for example, becomes part of the loan.
A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.
Mortgages not guaranteed or insured by these agencies are known as conventional home loans.
Conforming loans Jumbo loans Sub-prime loans
Non-conforming loans Portfolio loans
If your income and credit qualify and you want to purchase a new home or merely lower the rate or term of you existing home, a Conventional loan may be what is best for you. Conforming loans require a down payment/equity usually around 20%,
If you need to take cash out for any purpose Conventional financing will allow you to borrower up to 85%* of your home’s value. You can apply for pre-approval of a loan which helps you determine what you can afford to borrow (pre-approval is not guaranteed) or you can apply for a loan after you find a property you are interested in buying. Always check with your Loan Officer for specific guidelines.