Conventional loan. This has been the mostpopular loan type, and is most useful if you think you are going to stayin your home for a long period of time (at least five years). Aconventional loan usually requires at least a 10% down payment.
If you are going to buy your first home, it canoften be difficult to save a significant down payment. There are anumber of loan programs specifically tailored for this situation. Onegovernment program is administered by the Federal Housing Administrationand is known as an FHA loan. The FHA actually guarantees this type ofloan, so that lenders get paid back if the borrower defaults. FHA loanscan require only a 3% down payment, or possibly even less. FHA loanshave limitations on size, and are more expensive because they requiremortgage insurance, which adds to the overall cost of the loan. With FHAloans, many of the closing costs (including the initial mortgageinsurance premium) can be added to the loan amount, reducing the needfor more cash at purchase time.
Many conventional loans require that downpayment funds come from income savings or from the sale of anotherproperty. These programs often require proof of the source of downpayment funds. An FHA loan allows gift funds to be use for the downpayment, and no verification of source is required. The source of thedonor is restricted to family members and a few types of organizations.
Mortgage insurance for FHA loans currentlyrequire a 1.5% premium to be paid at purchase time, and a renewalpremium of 0.5% every year of the loan term. On a non-FHA conventionalloan, the mortgage insurance premium can be as low as 0.5% and renewalsas low as 0.3% during the loan term. If the down payment is largeenough, mortgage insurance may not be required at all. Many borrowerswill pay mortgage insurance for the first few years of the loan, butwhen enough equity has accumulated, they will re-finance their loan inorder to stop paying the mortgage insurance renewal.
Veterans Administration Loan. If you are a veteran you may qualify for aVeterans Administration (VA) loan. VA loans require no down payment inmost cases, and you don’t have to pay a monthly mortgage insurancepremium. Many mortgage lenders are prepared to help you get a VA loan.
