How loans work

Written By Andreas Schonger

Disclaimer: I am not a licensed mortgage lender or financial advisor. However, as a real estate agent, I have extensive knowledge of the home buying process, including the types of loans available and general lending requirements. The information provided in this post is meant to offer helpful insights and guidance based on my experience. For personalized financial advice or loan options, I recommend consulting with a licensed mortgage professional.

Understanding Mortgages: A Guide for Homebuyers

Buying a home is one of the most significant financial decisions you'll make, and for most people, it starts with securing a mortgage. With so many different types of loans available, it can feel overwhelming to understand which one is right for you. Let's break down the most common mortgage options, including VA loans, FHA loans, conventional mortgages, and down payment assistance programs like the Covenant Homeownership Program, to help you navigate the process confidently. I want to communicate that I am not a lender. It is important to consult with a licenced lender to navigate that process.

1. Conventional Mortgages

A conventional mortgage is the most common type of home loan, not backed by any government agency. These loans typically offer competitive interest rates and require a higher credit score compared to government-backed loans. A down payment of at least 20% is ideal to avoid paying for private mortgage insurance (PMI), but many lenders allow buyers to put down as little as 3% with good credit.

Pros:

  • Flexible terms (15, 20, or 30 years)

  • Competitive interest rates

  • No upfront mortgage insurance

Cons:

  • Higher credit score requirements

  • May require a larger down payment

  • PMI required with less than 20% down

2. FHA Loans

Federal Housing Administration (FHA) loans are designed for buyers with lower credit scores or less cash for a down payment. The FHA guarantees the loan, making it easier for lenders to offer competitive rates. With an FHA loan, you can put down as little as 3.5%.

Pros:

  • Low down payment options

  • Easier approval for those with lower credit scores

  • Available for first-time homebuyers and repeat buyers

Cons:

  • Mortgage insurance premium (MIP) is required upfront and monthly

  • Loan limits vary by area, potentially limiting high-cost home purchases

3. VA Loans

Veterans Affairs (VA) loans are available to active-duty service members, veterans, and eligible surviving spouses. These loans offer incredible benefits, including zero down payment and no PMI. The VA guarantees part of the loan, reducing risk for lenders and making homeownership more affordable for those who have served our country.

Pros:

  • No down payment required

  • No PMI

  • Competitive interest rates

Cons:

  • Only available to eligible veterans and service members

  • VA funding fee required (though it can be financed into the loan)

4. Down Payment Assistance Programs

For buyers who may struggle to come up with the down payment, there are several assistance programs available. Many states and local governments offer grants or forgivable loans to help cover a portion of the down payment and closing costs. These programs are typically designed for first-time homebuyers or those with moderate income levels.

Pros:

  • Can significantly reduce out-of-pocket costs

  • May be combined with other mortgage options

  • Some programs offer forgivable loans

Cons:

  • Income or location restrictions may apply

  • Could come with additional eligibility requirements

5. The Covenant Homeownership Program

Washington State recently introduced the Covenant Homeownership Program, designed to address disparities in homeownership among Black, Indigenous, and other marginalized communities. The program offers down payment and closing cost assistance to qualifying homebuyers who have faced historical housing discrimination. This initiative can make homeownership more accessible for those previously locked out of the housing market.

Pros:

  • Tailored to address historical inequities in homeownership

  • Provides significant financial assistance

  • Helps bridge the gap for marginalized communities

Cons:

  • Limited to Washington State residents

  • May have specific eligibility criteria

How to Choose the Right Mortgage for You

When choosing a mortgage, it's essential to consider your financial situation, homeownership goals, and eligibility for various programs. For example:

  • If you're a veteran or service member, a VA loan might be your best option for its zero-down benefit.

  • If your credit score is lower or you have limited savings, an FHA loan can offer a path to homeownership.

  • If you're looking to buy with a low down payment and strong credit, a conventional loan may provide competitive rates.

  • For buyers needing financial assistance, down payment assistance programs or the Covenant Homeownership Program can bridge the gap.

It's always a good idea to consult with a local professional lender to explore your options and find the loan that best fits your needs.

Andreas Schonger
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