Mortgage 101 - Mortgage Types

A Realtor friend emailed me yesterday to ask if I had some basic mortgage information she could use.  She was teaching a pre-licensing class to potential future Realtors and wanted to have something to share with people who might know little to nothing about the mortgage side of home buying. 

Sadly, I didn't have anything to give her.  My material is typically written with the seasoned Realtor in mind.  What she needed was handy in my hyper little brain though, so I stopped what I was doing, put together a simple grid of options, and sent it over.

As I looked at the grid, I realized it could be good information for other Realtors and homebuyers as well so - fun fun! - I'm posting it here.  Let's take a minute to dive into Mortgage 101...

Mortgage Types

People who are new to the real estate industry don't always know that there are different types of mortgages.  While Realtors don't need to become experts on mortgage types, it's important for them to have a working knowledge of what mortgages options are out there and the pros and cons for each.  Here's a brief summary of the four most common ones:

	Conventional	FHA
What it is	This is your ‘plain vanilla’ mortgage made by a bank to a buyer with no third party involved	FHA loans are loans insured by the Federal Housing Administration (part of HUD).
Pros	·         Lower monthly mortgage insurance, making the overall payment lower ·         No mortgage insurance needed if 20% down ·         If mortgage insurance is needed, it can go away once buyer has 20% equity ·         property standards are not as picky ·         Less paperwork involved	·         More flexibility with bruised or newer credit, limited savings or tighter debt-to-income ·         Down payment can be gifted from a family member ·         Interest rate is often lower than that for a conventional loan ·         Lower minimum down payment needed than with conventional (3.5% vs. 5%)
Cons	·         Holds buyer to a higher standard in terms of credit, savings and debt-to-income ·         Larger down payment needed (5% minimum typically) ·         Interest rate and monthly mortgage insurance are more expensive with lower credit scores	·         Monthly mortgage insurance is typically more expensive and it normally stays for the life of the loan ·         FHA charges a 1.75% upfront fee (rolled into the loan balance) ·         The property needs to meet a higher standard than is needed for conventional loans ·         More paperwork is involved

  

	USDA	VA
What it is	USDA loans are guaranteed by USDA for homes in areas deemed ‘rural’	VA loans are guaranteed by the Department of Veteran Affairs for eligible Veterans
Pros	·         No down payment needed ·         Monthly mortgage insurance is less expensive, making the overall payment lower ·         In some situations, the cost for repairs can be rolled into the loan ·         Interest rate is often lower than for a conventional loan	·         No down payment needed ·         No monthly mortgage insurance, making the overall payment lower ·         VA Funding fee can be waived if Veteran has over 10% disability ·         Interest rate is often lower than for a conventional loan
Cons	·         Only homes in eligible areas can be financed with USDA mortgages ·         USDA needs to review all files which often delays the closing process ·         The home needs to meet minimum property standards set by USDA that can be more stringent than on some other loan types	·         Property needs to meet a slightly higher standard ·         Seller has to pay for certain fees that typically are paid for by buyer (termite inspection and title company closing fee) ·         More paperwork is involved

 Does this chart cover everything that needs to be known about these types of loans?  Absolutely not!  It's purely a high-level overview of some of the more important details.  It does help to give a working knowledge, though, of what options a buyer has. 

When your buyer is ready to dig into their options deeper and determine which one truly benefits them the most, call me.  I'll review their situation in depth to see where they're going to get the most bang for their buck. 


Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.