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What are the different types of financing for a home purchase?

If home financing is new to you, you might have a few questions. Why are there so many different kinds? Why are some not always accepted by the sellers? Who qualifies for what types of financing?

 

The key to success here is to get an experienced mortgage lender who knows all of the financing options inside and out. You’ll also want a real estate agent who knows how financing plays a role in getting an offer accepted and closing the sale. In the meantime, here’s a brief explanation of the most common types of financing to get you started.
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Cash

Just like it sounds, cash offers refer to buyers who can pay for the property upfront. In this case, cash means the complete lack of financing because the buyers are ready to close on the deal when the offer is made. Sellers are especially fond of this type of financing for a few reasons:

 

  1. a) The home does not have to go through an appraisal. An appraisal shows the lender the value of the home. You can read more about appraisals here

 

  1. b) Cash sales typically mean that the sale can close faster, since they don’t have to go through underwriting

 

  1. c) There is little-to-no chance that cash financing will fall through.

 

There very few downsides to buying with cash. Sometimes, some buyers think that they can make a lowball offer just because of the upsides of cash. That may have worked in 2009, but sellers in this market are expecting at least full price. If the property has been on the market for a while, making a lower offer is something your real estate agent can advise you on.

 

Conventional

Conventional loans are among the most common types of loans, albeit a bit more difficult to qualify for. To qualify for this type of loan, buyers need to have a higher credit score and low debt-to-income ratio. If your credit score is lower than 620, you may have to put 20% down. The relation between credit score and downpayment varies from lender to lender. For a higher credit score down payments can be between 3-5%, but anything under a 20% down payment requires mortgage insurance.

 

VA

VA loans are available to US military veterans. In this case active duty, retired, discharged, reservists, and spouses (in some cases) can qualify. Here’s a more in-depth explanation of VA loans, including eligibility requirements.

 

VA loans are mortgages guaranteed by U.S. Department of Veterans Affairs though qualified lenders. This loan can be a great option for those who have served because a downpayments isn’t a must have. That’s right, a VA loan has the option for zero percent down. In addition, VA loans do not require mortgage insurance.

 

However, VA loans do have set limits on liability they are willing to take on, so make sure to check with the county you are considering purchasing in as these limits vary by location. In a home seller’s market, like ours, some sellers are wary of accepting a VA loan because of the strict appraisal requirements.

 

FHA

FHA or Federal Housing Administration loans are part of the U.S. Department of Housing and Urban Development as a way of assisting and encouraging home ownership. Popular among first-time buyers, FHA loans are easier to qualify for and allow smaller down payments going as low as 3.5%.  

 

Similar to a VA loan, the appraisal requirements for an FHA loan are more strict than a conventional loan. As with a VA loan, these appraisal requirements can make a seller wary. FHA loans also enforce a maximum loan limit and always require mortgage insurance. Due to a recent change, mortgage insurance is required for the life of the loan. Read more about FHA loans here.

 

USDA

The US Department of Agriculture introduced loans as parts of its Rural Development program as a way to assist small town economies across the US. Like a VA loan, USDA loans do not require a down payment but comes with a certain set of restrictions. In this case, you might not qualify for a USDA loan if you exceed a max level of income or already have the money for a 20% downpayment. USDA loans are also reserved for rural and suburban areas, which is why you may not see many of these as a financing option near a major city.

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