This sponsored, biweekly Q&A column is written by Andrew Goodman, broker/owner of Goodman, Realtors. Based in Bethesda, Andrew serves clients in Maryland, D.C., and Northern Virginia. Please submit comments, questions, and opinions in the comments section or via email.
Question: I am trying to decide which loan is best for me. There are so many loan programs out there, how do I choose?
Your lender and Realtor should be able to guide you through the process so you know which loan suits you best. This should be done prior to writing any offer on a property, as the contract/addenda will change depending on which type of loan is being obtained.
The most influential factors in determining a loan are the amount the borrower has to put down and the borrower’s credit score. The more you put down, the cheaper your monthly payment should be. The higher your credit score, the better the interest rate should be. But there are some other items you should be aware of before deciding on the right mortgage.
Conventional: The conventional loan is the most commonly used loan. The reason being is that it tends to lead to a lower monthly obligation.
A conventional loan product requires you to put at least 5 percent of the purchase price down as a down payment. There are some lenders out there that do have 100 percent financing options, however I tend not to recommend them, as the interest rate tends to be on the higher side (not to mention your credit score must be relatively high). Even if the mortgage interest rate is higher than some of the other loan products, if the borrower has a good credit score, a conventional loan could have a lower associated monthly obligation because their private mortgage insurance (PMI) could be at a cheaper rate.
There are two types of mortgage insurers, government (MI) and private (PMI). I always recommend borrowers to put down at least 20 percent of the purchase price when purchasing a property because the borrower will avoid paying mortgage insurance. A mortgage insurance policy protects your lender in case a buyer defaults on the payments. Mortgage insurance is a monthly (or upfront) fee charged to the borrower for any loan greater than 80 percent LTV (Loan To Value).
FHA: A FHA loan is great for buyers who don’t have a large down payment. A borrower can put down as little as 3.5 percent to obtain this type of loan. The downside to this loan is that the mortgage insurance, insured by the government, is at a set rate no matter the credit score.
So if the borrower had a good and high credit score, the mortgage insurance rate could be lower with a conventional loan product than a FHA loan. This program also causes some issues if the borrower is trying to purchase a condominium. If that is the case, the condo complex must be FHA approved. The condo complex approval process deals with the finances and warranties of the condos.
In our area, there are many buildings that are or were FHA approved, but several buildings’ FHA approval has since expired and the management company or condo association hasn’t put the work in to have it reapproved.
VA: A VA loan is for military personnel who are trying to purchase a home and don’t necessarily have a large down payment or a down payment at all.
This loan allows folks who are in or who were in the military to obtain a 100 percent loan, not requiring any down payment. With a VA loan, there is no mortgage insurance, however there is a funding fee.
The funding fee will vary depending on the borrower’s military standing. Like the FHA loan, if a VA borrower is trying to purchase a condominium, the condo complex must be VA approved. This does limit the condo inventory, as many complexes have not spent the time to get VA approved.
Second Trusts: If you remember, during the “bubble,” many borrowers were obtaining 100 percent financing, but this was structured quite differently to avoid having the borrower paying mortgage insurance.
Second trusts, not nearly as common today (however still available) allow the borrower to obtain a first trust for 80 percent LTV and then a second trust for the remaining 20 percent.
Today, second trusts vary and do come with a typically high interest rate. I’ve seen second trusts available today for 10 percent LTV — so the borrower would be able TO obtain an 80-percent first trust, a 10-percent second trust, and only have to put down 10 percent. Unfortunately, I haven’t seen many 20-percent second trusts available these days.
Be sure to keep track of your balance of the loan, because as you get to 80 percent LTV you may be able to remove your mortgage insurance. (FHA loans typically require private mortgage insurance for the life of the loan.)
Lenders come up with different programs on a daily basis. Loan standards also change quite often. Please speak with a lender and your Realtor to determine which program is best for you.
