“Even the once simple home mortgage now has so many flavors and styles and variations that it is difficult for people to make a decision.”

Scott Cook

Home mortgages come in all shapes, sizes and complexities. Before you ask yourself, “What type of home loan is best for me?”, make sure to understand what impact the answer may have.

Certain mortgages can give you more or less bargaining power when purchasing a home. Imagine for a moment that you are a home seller entertaining offers on your home. You receive two offers, both for the same selling price. One offer must follow stringent guidelines and requires you to pay extra closing costs. The other solely depends on the appraised value and can close quickly. As a seller, which would you choose?

My point is, when shopping for a home, it is important to know ahead of time what type of home Loan will be good for you. Discuss it with your Realtor so they have all the ammo they need to get you a great deal on the home of your dreams.

Many loan types, especially FHA and VA loans, require extra requirements be fulfilled before a loan is complete. While there are inherent benefits to these loan types, be aware that they can affect the acceptance or rejection of an offer.

The Pros and Cons of Different Types of Home Loans

FHA Loans

FHA loans are mortgages insured by the Federal Housing Administration. The loans are guaranteed through mortgage insurance paid by the borrowers. This protects the lender if the loan goes into default.

Pros

• Low down payment, typically 3.5%
• Higher allowable debt-to-income ratio for borrowers
• More forgiving of credit blemishes
• Government insured to protect lenders, leading to more lenient lending with easier approval

Cons

• Mortgage insurance premium collected upfront at closing
• Mortgage insurance annual premium due monthly
• Homes must meet HUD minimums for health and safety
• Older homes or homes in neglect may require lots of repairs before loan approval

*The Guidelines for an FHA loan

Related: The Pros and Cons of FHA Loans

VA Loans

VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. The loan is issued by qualified lenders and was designed to offer financing to American Veterans and their surviving spouses.

Pros

• No down payment up to a certain loan amount
• No private mortgage insurance required (normally required for borrowers who cannot put at least 20% down)
• Higher allowable debt-to-income ratio for borrowers

Cons

• VA funding fee: A mandatory charge to keep the VA program running in the future
• Properties must meet specific guidelines
• Can only be used for the purchase of a primary residence
• Cap on buyer paid closing costs, making it likely that the extra costs will be added to the selling price of the property or forced on the seller

*The guidelines for a VA loan

Conventional Loans

Conventional loans are not insured or guaranteed by the federal government. They can be fixed or adjustable rate loans.

Pros

• No mortgage insurance or less expensive mortgage insurance, depending upon your down payment
• Fewer hurdles than other loans
• Loan guidelines only concerned about property condition as it relates to the value of the property (great for a fixer-upper)
• Usually provides the most bargaining power with a seller

Cons

• Higher down payments, from 5% to 20%
• Higher credit standards
• Tons of different available programs from different lenders, making it difficult find the perfect option

Related: How To Avoid Online Real Estate Information Overload

Hard Money Loans

Hard money loans are usually for investors and real estate flippers. These loans are typically funded by private investors with higher interest rates and much shorter terms. These loans are normally reserved for projects lasting from a few months to a few years.

Pros

• Easy to qualify
• Often based on personal track record and previous project results
• Short approval process

Cons

• High interest rates
• High down payment
• Short loan term

As you can see, the best type of home loan depends upon your situation. We have just scratched the surface in this overview of the different loan types. Many other regulations and guidelines pertain to each mortgage, so please do your research!

I also recommend contacting mortgage companies in your area. Working with a local lender familiar with your area is to your advantage. If you are unsure of what type of home loan will work for you, reach out. I am more than willing to discuss the differences in more detail.

Have you ever had a home offer rejected due to the type of home loan you chose? Tell me about it in the comments.

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