In the real estate industry there are many different loans all designed for a specific purpose. Some loans are for individuals and families, and other loans are geared toward investors and commercial developers. Most individuals end up with a traditional single family loan, an FHA mortgage, or the 203k. Why? Because these are the lost that typically meet the needs of the individual. Each one of these loans has a unique set of advantages and disadvantages for the homeowner. Ultimately the loan type you decide on will be determined by your finances and your specific needs in a home.
The Financial Benefits of FHA Mortgages
For most people FHA mortgages and traditional loans meet their housing needs, but these loans are not created equal; one loan may offer more benefits than the other depending on your financial situation. The biggest difference in these loans is that all federally approved loans are insured by the government while your traditional loans are not, so the guidelines for approval on each of these loans is different. Traditional loans follow the guidelines of Freddie Mac and Fannie May while your FHA mortgages follow the guidelines of the Federal Housing Administration. Of course, each of these guidelines has its own set of restrictions.
The biggest difference in the two loan types is the upfront financial investment and the requirements for approval. A traditional lender requires a large down payment, sometimes up to twenty percent; the number will vary depending on the lender. A federally approved lender requires a much smaller amount down, sometimes as small as three and a half percent. With a traditional lender this down payment needs to come from funding that you provide, often through a savings account. For an FHA loan, the funding can come from many sources, including a gift from a family member or charity.
Closing costs are another big fee that you have to pay from the get go. They are required on both loans, but with a federally insured loan you may be able to roll these costs into the mortgage payment. This will have to be discussed with your lender, but it is an option that many people are able to take advantage of.
Your Financial History and Credit Score
Aside from the initial monetary investment, for both loans you won’t be able to qualify unless you meet the financial requirements. Traditional lenders require a credit score of at least 620, with 740 being the preferred number to avoid higher interest rates and fees. A federally approved lender determines what score he is willing to work with, but a good rule of thumb is that if you have a score as low as 580 you may still be able to qualify for a loan without any additional fees or rate increases. Lower than that will be at the lender’s discretion and may come with higher interest rates. In addition to this, you will also need to show your lender your financial history. With a traditional lender he will determine what risks he is willing to take in a buyer in terms of your financial history. With a federally approved lender if you have a two year work history with the same employer, you can show proof of a steady income for those two years, and you can show that you have taken the steps to improve your credit rating, you are on track for possible approval for the loan.
A key difference that is worth noting is that traditional lenders are willing and able to work with unique lending situations, such as balloon payments and lease options, while federal lenders are limited to the following six mortgage options:
- Graduated payment
- Growing Equity
- Fixed Rate
- Adjustable Rate
- Energy Efficient
If you want a loan that does not fall into one of these six categories, you will need to approach a traditional lender.
If you’re not sure which loan will be best for you than you’ll want to discuss your options with your real estate agent and loan officer. They are professionals in the business and typically know what the best options will be for each situation. Discuss with them your financial state and any issues that may be on your credit report, as well as what you’re looking for in a loan and a home. With their help you will be able to get the loan that is right for you.