Types of Home Loans
Understanding types of homes loans and knowing which one is for you is often the first step in looking for a property. Comparing them side by side is an easy way to start or continue the conversation with your mortgage lenders. These are the main types of loans your property will likely fall under for your next purchase!
I personally used FHA (3.5% down payment) for my first home when I was buying a 3-bed in KC by myself, a Conventional Loan (5% down payment)for my first house with my husband, and a Vacation Loan (10% down payment) for our first vacation home/distance airbnb property.
Disclaimer: You should always speak with your mortgage lender to confirm which of these loans would be best for your specific situation or if any additional rules or guidelines apply.
VA Loan:
Are you a veteran? Yes - Thank you for your service.
If not, are you interested in buying a home with a veteran? Yes – read on.
If not, sorry, this doesn’t apply.
The Veteran’s Affairs Loan allows anyone who has proof of military service to buy a home with 0% down and no PMI. You just need a credit score of at least 620.
Often, you can only have one VA Loan at a time. Always check with a mortgage lender experienced with VA loans to find out if there are any workarounds, if needed, for your specific situation.
FHA Loan:
An FHA Loan is similar to a conventional loan in its convenience and popularity, but allows individuals to put a down payment 3.5% as compared to 5% and is only applicable to first time home buyers.
This option was created by the government to encourage more individuals to buy their first home as research started showing people waiting until they were older to buy their first home. This significantly reduces the amount a person needs to save in order to buy their first house.
Conventional Loan:
When buying a home, the conventional loan is well, conventional. This is the most common type of home loan and is the type of loan used for 64% of all home purchases (1). As of 2020, you only need to put down 5% of a down payment, but can put down 20% to avoid PMI, Private Mortgage Insurance. This is a strong way to enter a real estate contract, and shows you’re interested, though shy of a full cash offer.
This type of loan is also better for the seller in that it doesn’t require them to make any additional repairs. Those can always continue to be negotiated as the inspections are completed and more issues and state of the house are identified, but are not required like an FHA Loan.
Vacation Loan:
This is still technically a conventional loan, but for a second home acting as a vacation property. Normally, for a second property that is not your primary residence, and individual would need 15-20% down. This vacation home classification allows someone to purchase a property with only 10% down instead. It will also usually have lower interest rates than a pure investment property.
To qualify as a Vacation Home specifically, it must meet the following:
Be a one-unit property that’s suitable and available for year-round use.
Be occupied by you as the borrower for part of the year
Be controlled exclusively by you and not a property management company
Not be a timeshare arrangement
You must live in the home for whichever is more: 14 days or 10% of the time it’s available for rent
Must be 50 miles or more from your primary property
You are allowed to share this property with friends and family, and are allowed to rent it out, but you must use it for a portion of the year. It cannot be a full-time rental property.
Our thought process was to get something 2 hours away so we could still manage it, live there for a minimum 4+ weeks yearly for repairs, share with family and friends for 4+ weeks per year, and use 4+ weeks for both my husband and I to have girls/guys/and couples’ getaways throughout the year. Otherwise, it lives on Airbnb and we list, prepare, and flip the property for each round of guests ourselves.
Investment Property Loan:
This is for any property outside of your primary residence, with the exception of a Vacation Home. If you want to buy the house next door and use it for renters, this is for you. If you want to buy a home to flip, this is for you.
It will come with higher interest rates and a 15-20% down payment, but can be oh so worth it when you make the numbers work.
Resources:
(1) https://themortgagereports.com/16684/conventional-loans-dominate-mortgage-market#:~:text=Conventional%20Loans%20Are%2064%25%20Of%20Mortgage%20Market