There are a variety of different home loan options to help you finance your next home. Understanding the difference between them and determining which one works best for you can be tricky, but thankfully there are real estate and mortgage professionals there to help you. Below we outlined some of the most common types of loans, though keep in mind there are more options out there. For more information, please contact us at Rosie’s Team and we would be happy to help you!
What Is the Difference Between Conventional and Government-Backed Loans?
When you’re thinking about your mortgage options, it’s important to understand the difference between conventional loans and government-backed loans.
Government-backed loans include options like VA loans—which are available to United States Veterans—and Federal Housing Administration (FHA) loans. FHA loans are backed by the Federal Housing Administration, and VA loans are guaranteed by the Veterans Administration.
With an FHA loan, you’re required to put at least 3.5% down and pay MIP (mortgage insurance premium) as part of your monthly mortgage payment. The FHA uses money made from MIP to pay lenders if you default on your loan.
A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders such as banks, credit unions and private mortgage brokers.
There’s a reason why conventional loans are so popular. This type of loan has several features that make it a great choice for most people like, low interest rates, fast loan processing, diverse down payment options, starting as low as 3% of the home’s sale price, various term lengths on a fixed-rate mortgage, ranging from 10 to 30 years, and reduced private mortgage insurance (PMI)
What is FHA?
In 1934, the Congress of the United States of America created the “Federal Housing Administration. At that time, the housing industry was very poor. Only 4 in 10 households were actually owned. Most citizens were tenants. Millions of workers had lost their jobs. And if you were employed, home loans were very difficult to obtain and pay back. Most loans were required to be paid back in just a few years and were limited to fifty percent of the home’s value. Lenders were very hesitant to lend money. So, this new entity, known as FHA provided mortgage insurance on loans made by certain “FHA-approved lenders” throughout the United States and its territories.
FHA mortgage insurance provided lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.
FHA continues to insure mortgages on single family and multifamily homes including manufactured homes and hospitals. It is now the largest insurer of mortgages in the world, insuring over 47.5 million properties since its inception.
During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war.
In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat.
The FHA became a part of the Department of Housing and Urban Development’s (HUD) Office of Housing in 1965.
FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.
What is a Rehab Loan?
An FHA 203(k) rehab loan, also referred to as a renovation loan, enables homebuyers and homeowners to finance both the purchase or refinance along with the renovation of a home through a single mortgage. Instead of applying for multiple loans, an FHA 203(k) rehab loan allows homebuyers to purchase or refinance their primary home and renovate it with one convenient loan. By allowing the buyer to finance the cost of improvements into the purchase or refinance of a home, home rehab loans take the financial guesswork and frustration out of renovating a home.
In the past, purchasing a fixer-upper was difficult: most banks wouldn’t grant a mortgage on a house in bad shape until repairs have been completed, but repairs couldn’t possibly be made until the house is purchased. This put homebuyers in a difficult position. Now, thanks to the FHA 203(k) rehab loan, it’s possible to purchase a property and include the cost of repairs and improvements in the loan — making it easier than ever before to purchase a fixer-upper or renovate your current home.
Rehab loans are designed to help homeowners improve their existing home or buy a home that can benefit from upgrades, repairs, or renovations. A 203(k) rehab loan is a great way to help you create your own home equity fast by bringing your home up to date. Not only will you be able to upgrade your home with your style and needs, but you’ll also be able to buy a home that’s usually listed at a lower price due to the older existing condition. That’s why a 203(k) rehab loan is great, it can help you gain equity and offer you great interest rates for your rehab in one loan.
In addition to a low interest rate, rehab home loans come with a low down payment and more savings options. Since only a minimum down payment of 3.5 percent is required, you won’t deplete your savings trying to come up with a down payment. Because FHA insures your mortgage, the qualifications for an FHA loan may be more lenient than for a conventional loan. Ultimately, 203(k) rehab loans are a convenient way to finance your home improvements without the need for perfect credit, huge down payments, or high interest rates.