Types of Home Loans, PMI, and MIP
What are the differences between the main types of home loans?
There are 4 main types of home loans: Conventional, FHA (Federal Housing Authority), VA (Veterans Affairs), and USDA (U.S. Department of Agriculture). Between these loans, there are a few key differences.
Conventional loans are not backed by the federal government and are usually better for borrowers with higher credit scores. If you don’t have 20% of the purchase price to put down on a conventional loan, you’ll like need PMI insurance. The next 3 loans all are backed by the federal government.
FHA loans are loans that are typically geared towards borrowers with lower credit scores and have less money to put down. FHA loans also have certain criteria for houses they will mortgage. You’ll likely need to pay MIP for FHA loans if you’re not putting 20% down.
VA loans are flexible, low interest mortgages for U.S. military and their families. There are no minimum down payments, credit score requirements, or mortgage insurance needed. VA loans also have certain criteria for homes they will mortgage.
USDA loans do not require a down payment and are usually geared towards low-moderate income individuals who want to buy a home in rural areas. Not all areas are eligible and and these loans require extra fees.
What is PMI? Will I need it?
PMI insurance is Private Mortgage Insurance. Your lender may require it if you have a conventional loan and aren’t putting at least 20% of the purchase price on your down payment. This is insurance for the lender, incase the borrower defaults on their loan. PMI insurance will usually cost .5-2% of the loan balance per year. Once you get 20% equity in your home in either paying down your loan balance or rising home values, you can contact your lender and get the PMI insurance terminated.
What is MIP? Will I need it?
MIP stands for Mortgage Insurance Premium. This will likely need to be paid if you have an FHA loan and are not able to put 20% down. FHA borrowers are required to pay two mortgage insurance premiums. One of them you pay at closing and the other you pay annually for the life of the loan. If you put at least 10% down using an FHA loan, you will likely only have to pay for MIP for 11 years instead of the life of the loan.
