While the traditional home mortgage loan is one that is backed by either Fannie Mae or Freddie Mac, there are actually several other types of loans that you may want to explore when purchasing a house. With these special programs, you may qualify for a better interest rate, lower down payments or other benefits that typically cannot be obtained with a conventional loan.
An FHA loan is a loan that is backed by the Federal Housing Administration, thereby reducing the risks that the lender has to make when giving you a loan. As such, it is easier to qualify for an FHA loan and you do not have to make a large down payment. In fact, if your credit score is 580 or higher, you may be eligible to make a down payment as low as 3.5 percent. If your credit score is lower than 580, you may still be approved, but your down payment will be at least 10 percent. In either case, FHA loans offer competitive interest rates and lower closing costs than conventional loans.
A VA loan is a loan that is backed by the U.S. Department of Veterans Affairs. Meant to assist active-duty members, veterans and surviving military spouses with purchasing a home, the VA backs part of the loan so lenders can offer special features. For example, you do not need a minimum credit score and you are not required to make a down payment with a VA loan. VA loans also come with competitive interest rates and you do not have to purchase private mortgage insurance. As an added bonus, the VA will negotiate on your behalf if you experience difficulty making payments.
FHA Section 203(k)
If you are interested in purchasing a fixer-upper, an FHA Section 203(k) loan may be just what you need. Like the traditional FHA loan, this loan is backed by the Federal Housing Authority. Unlike a traditional FHA loan, a Section 203(k) loan allows you to borrow the funds that you need to pay for the home and to make the necessary improvements. As such, it takes into consideration the value of the home after it has been renovated. Down payments through this program can be as low as 3 percent.
Energy-Efficient Mortgage (EEM)
If you want to improve the energy-efficiency of the property you are purchasing, you might want to apply for an Energy-Efficient Mortgage, or EEM. Insured through the FHA or VA programs, EEM loans allow you to roll the extra cost of creating an energy-efficient home into the cost of the primary loan. Examples of improvements that can qualify for an EEM loan include installing new insulation, double-paned windows or a modern heating-and-cooling system.
Backed by the U.S. Department of Agriculture, a USDA loan may not require a down payment at all. While the program does focus on homes in rural areas, obtaining a USDA loan does not mean you need to purchase or operate farm. Income limitations do apply for this program, with those limitations varying by region. In addition, if you have a credit score of less than 640, you may be required to present extra documentation about your payment history before you will be approved.