Given that the majority of houses bought are financed, it is important to have an idea about the types of loans available.
Conventional Loan: Widely used, it is a loan issued by a bank or a mortgage broker. This loan is not backed by any government agency. Even though most loans come with a Fix rate, some come with an adjustable rate. Down Payment varies depending on multiple factors but there is a zero down options and the borrower can put as much down as he/she likes. Typically the borrower will carry a PMI ( private mortgage insurance) for as long as the loan to value ratio ( LTV) is above 80% but once it reaches 80%, the PMI can be removed. This option provides more flexibility in the condition of the property and tend to be a good option for complex transaction.
FHA Loan: The Loan is insured by the Federal Housing Authority ( FHA). It is not issued by the government but rather by an FHA approved lender. It is a little easier to qualify for an FHA loan. in fact, one can qualify with a credit score of 580 and above and only need a downpayment as low as 3.5%. With a score between 500-579, one will need a downpayment of at least 10% in order to qualify. FHA Loans also carry a PMI. for any LTV greater than 90% at time of origination, the PMI will be paid throughout the life of the loan. For any loan with an LTV below 90%, the PMI is paid for 11 years or the life of the loan ( whichever comes first).
VA Loan: This loan is backed by the US department of Veterans Affairs. The loan is issued by an approved lender. the loan is only issued to Military, veterans and their families. There are 3 types of VA loans: Purchase loans, Interest Rate Reduction Refinance loans and cash out refinance loans.
VA loans have many benefits but the biggest one is the fact that it is a zero down loan. the borrower will need to have an adequate credit and sufficient funds to qualify.
USDA loan: This loan is backed by the US department of Agriculture. It is designed to help people in rural areas to buy, repair or renovate a property in rural areas. there are several types of USDA loans. USDA loans tend to offer very low rates, the borrower will need to have decent credit. Not all properties will qualify for USDA loans.
Seller financed: This loan is strictly between the seller and the buyer. the seller extends a credit to the buyer on approved terms. typically the seller can ask for a large down payment and financed the remaining portion. It can be used for those who do not qualify for a loan via a bank, those who do not want to pay interest or those who are waiting for a substantial sum of money. Those loans are typically short term loans and the buyer and seller sign a promissory notes. Let’s note that in most cases, the property is own free and clear by the seller.
Assumed mortgage: Basically, the buyer will take over the seller’s mortgage. this is ideal for a buyer when the seller’s rate is lower than the current rate, the closing costs are lower for the buyer. For the seller, the house can be sold a bit faster. the buyer will still need to qualify in order to assume a loan.
In most cases, the buyer might need to cover the difference between the selling price and the assumed loan which could push the buyer to take on a second mortgage or have sufficient cash to cover the difference.
Each loan will be discussed further in full details