Building the home of your dreams is a desired goal in life for many people regardless of their education level, social background or even nationality. The process involved can be exciting or highly frustrating depending on the preparation made before starting your new home project.
One key step to take under consideration while looking to buy or build a new home is securing financing. Today obtaining financing can be fairly simple when you know your credit score, have enough savings to cover out of pocket expenses, and know how much you can afford to service your monthly mortgage payment. Uncertainty about any of the above may result in an unpleasant experience, or even worst, a very expensive one. Being informed about the different products available to finance a home can have a big financial impact over time.
We’re here to discuss the different options available to finance a new home. Knowing the difference between a FHA loan, VA and Conventional Loans will help you decide which program best fits your personal needs. All three programs are issued by banks and other approved lenders. The main difference is that FHA and VA loans are backed by the government and Conventional loans are not. Each program has other distinctive characteristics which are highlighted below.
The first unique characteristic about VA Loans is the Government agency backing this program: The United States Department of Veterans Affairs.
The second unique characteristic about VA Loans is that they are offered to qualifying veterans and/or surviving spouses. Qualified borrowers can take advantage of several perks, but must go through a VA Loan-Approved Lender. The lender issues a short-term construction loan that is then refinanced into a VA Home Purchase Loan. Refinancing offers borrowers the ability to refinance at a lower rate when the lower rate hits the market. Also borrowers may qualify to roll over the closing cost into the loan. Cash out refinance option is also available if the borrower has enough equity and lives in the property.
VA Loans also offer no income restrictions, no down payment option and non-mandatory Private Mortgage Insurance.
Although FHA Loans are also guaranteed by the government this type of loan is issued by the Federal Housing Administration and is available to all borrowers.
One very unique characteristic about FHA Loans is that even though they are issued by traditional lenders they are insured by the government against default. For this reason lending requirements are less strict and down payment required can be as low as 3.5%. However, one important limitation about FHA Loans is that the market’s lowest interest rates are not available under this program.
Another great advantage of FHA Loans is that even when private mortgage insurance is required the coverage terms are more flexible than those used on Conventional Loans, fees are rolled into the loan and seller can contribute with up to 6% of total closing cost.
Even though FHA Loans may allow a higher Debt to Income Ratio the final number loaned will depend of the institution you are working with. Finally, FHA Loans have a limit on the maximum loan amount allowed and may vary depending on if the property is a single home or a multi-unit (up to 4 units) property.
Always consult a trusted advisor before making a decision about this financing option is right for you. If you believe you qualify for a more conventional loan, you can click here to learn about the new construction-to-mortgage options offered by most lending institutions.