It is no secret that buying your first home can be an exciting time. You may be asking yourself, "How many bedrooms will I have? Will my home be a single story or two-story? How much land would I want?" These are all great questions to ask throughout this process. It is always a good idea to know what you want before you buy. The second question that you should be asking yourself is, "How am I going to pay for it?" In my experience, a large majority of home buyers do not have $150,000-$200,000 to put down on their first house. In fact, almost none do, especially if they are young and newly married. So, where does that leave you? In this article, we will be discussing the benefits and drawbacks of the three major types of mortgage loans offered to most first time home buyers in the United States.
FHA
Benefits
FHA Loans are federally insured mortgage loans that are issued by approved lenders throughout the United States. If you default on your mortgage, the federal government will ensure financial security for the lender. When banks, credit unions, and mortgage companies receive this assurance, it allows them to incur more risk. With FHA Loans, homebuyers can provide a smaller down payment at closing with a minimum ranging around 3.5%. That would mean if you wanted to purchase a home for $200,000, you would only need $7,000 as a down payment, excluding closing costs. This is one of the main benefits of having an FHA Loan.
Drawbacks
FHA Loans can be beneficial when you want to buy a home with a smaller down payment. Only putting 3.5% down can help you purchase new furniture, get a new car, or save for a rainy day. While this might be viewed in a positive light, how can FHA loans be looked at as a drawback? When you receive an FHA Loan, you will generally have to pay additional fees along with your monthly payment. These fees usually include MIP (mortgage insurance premium) as well as an annual premium. According to Business Insider, "Not only do you have to fork over an upfront MIP payment of 1.75% of your loan amount, but you must also pay an annual premium that works out to around .85% of your loan. Worse, FHA borrowers typically pay these premiums for the entire life of their mortgage — even if it lasts 30 years." FHA Loans can also place caps on how much you can borrow depending upon your area. When considering an FHA Loan, make sure to do your research before you close on your first home.
VA
Benefits
VA Loans are guaranteed loans issued by the Veterans Administration. These loans are great for those who have served in the United States military. If you qualify for a VA Mortgage Loan, you will be guaranteed financing with as little as 0% down. This can be beneficial for first time home buyers that plan to use their money for other expenses. Also, you will be given additional benefits such as lower closing costs, no mortgage insurance, and no prepayment penalty.
Drawbacks
One of the main drawbacks to VA Loans is qualifying for them. To receive a VA Loan, you must have been affiliated with the military for an extended time (check VA Loan requirements). This will automatically exclude a large portion of the population. On top of this, VA Loans generally take longer to complete the closing process along with a funding fee. Mortgage Solutions Financial describes VA Loans: "With every VA mortgage loan, there are certain fees. While you can negotiate the lender’s portion of it, there is no negotiating the funding fee that the VA charges. This fee can range from about 1.25% to well over 3%, depending upon how much you are putting as a down payment, etc." This can be a setback as it is the goal of most people to close as fast as possible with very few fees. Make sure you know all of the closing information before you decide a VA Loan is right for you.
Conventional
Benefits
Conventional Loans are loans usually provided by banks, credit unions, and mortgage companies that are not federally insured by the government. Due to these loans not being insured, it generally allows for fewer restrictions. This can make the closing process much quicker than an FHA or VA Loan as there is less "red tape" that the lender has to go through. Also, in some cases, Conventional Loans can require a lower down payment for those who qualify. According to The Balance, "Traditionally, a 20% down payment has been the standard for conventional loans, but it's now possible to get a mortgage through Fannie Mae or Freddie Mac with a down payment of 3%." This could make a Conventional Loan slightly more attractive to some first time home buyers.
Drawbacks
Although Conventional Loans can be very beneficial to first time home buyers, they can also have their drawbacks. While we already know that Conventional Loans generally require a larger down payment, they also come with more closing costs. These closing costs might include lending fees, appraisal fees, and attorneys fees that makeup roughly 2%-5% of the total sales price. Closing costs for a Conventional Loan will need to be paid in full for the loan to be finalized. Likewise, Conventional Loans require PMI (private mortgage insurance) on all mortgages that have a down payment lower than 20%. PMI generally runs around $75 per month per $100,000 borrowed. It is important to note that PMI is for the benefit of the lender, not the borrower. If you are thinking about going with a Conventional Home Loan, please make sure that you know all of the information before you sign.