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Different Types of Mortgage Loans

There are different types of mortgage loans from conventional loans that are not backed by the government to VA and FHA Loans which are backed by the government.

Conventional Loans

Conventional Loans are loans that are not backed by the government. Usually when lenders make conventional loans they require the homeowner to make a large down payment usually 20% of the purchase price of the home. If the down payment is less than 20% the lender will need the homebuyer to buy Private Mortgage Insurance (PMI) which will cover the lender if it ever faces a loss due to a foreclosure. PMI would no longer be needed once the homeowner had accumulated 20% equity in the property.

Veteran Administration loans - VA loans

VA Loans are simple to qualify for and are loans that need no down payment. Veterans of the armed forces are eligible for VA loans. Since VA loans do not require a down payment the homeowner has no equity. Therefore, VA properties that are foreclosed have little equity and very little if any profit margin.

Federal Housing Administration loans - FHA loans

FHA loans were started by the government as an affordable way for homeowners to be able to get their first home. Down payments for FHA loans are much lower than conventional loans, as low as 5 percent. Making it much easier for homebuyers to purchase a home.

The FHA promises to pay lenders the if a borrower defaults on an FHA loan. To fund this obligation, the FHA charges borrowers a fee. Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP) of 1%. They also pay a small recurring fee with each monthly payment. Should a borrower default on an FHA loan, the FHA uses collected insurance premiums to pay off the mortgage.

FHA loans aren't for everyone one because they do not let you borrow as much money as conventional loans. FHA loans also do not have as many loan types.
The Department of Housing and Urban Development (HUD) ends up with all the FHA and VA foreclosures. Anyone can buy a HUD home but HUD does not warrant the condition of its properties and will not pay for defects or repairs. If you are interested in a HUD home it is strongly recommended that you get a professional inspection prior to submitting an offer to purchase. HUD does not provide direct financing to buyers of HUD Homes. Buyers must use cash or get financing through a mortgage lender.