Step 2: Understanding different types of loans and choosing the right one for you.

Step 2:  Understanding different types of loans and choosing the right one for you.

Let me start this by saying I am no expert, nor do I even fully understand all the different types, but from going through this myself, these are the things we learned the hard way.

When we first started talking about buying a house, we knew there were two loans out there. FHA and Conventional loans.

FHA Loans:

• You only need to put down 3.5% of what the home is. So if your home is $100,000 you only need to put down $3,500.

Convention Loans:

• require at least 20% down. So if your home is $100,000, you will need to put down $20,000.

Being first time homebuyers, we knew that it would take us a few more years to be able to have 20% to put down on a house so of course we started our home buying journey planning on doing an FHA loan.

We found THE HOUSE and put our offer in. We REALLY wanted the house so we told the seller we would be able to close in 30 days. The next day we told our lender we had made an offer and asked what our next steps were...Little did we know, there were a lot more requirements that went along with FHA loans....

FHA Loans:

• if you have worked part time (like ME working for three different dental offices) for less than 2 years at the same place, your income doesn't count towards what you qualify for a mortgage.
• if you get paid on commission (like DAN working for Enterprise) for less than 2 years, your income that is paid on commission doesn't count towards what you qualify for a mortgage.

So suddenly the amount we thought we qualified for, dropped SIGNFICANTLY and the house we fell in love with no longer looked like a suitable option. AND THEN we found out that by doing any FHA loan required an extra expense each month called MORTGAGE INSURANCE.  Even if Dan's and my salaries worked out, we would have to pay an extra $250 each month for mortgage insurance JUST BECAUSE we had an FHA loan. $250!! Are you kidding me? That was not in my initial budget......


So I freaked out. We didn't have 20% to put down, and we didn't meet the requirements for FHA loans... what were we going to do?????????


Piggyback 80-10-10 Loan:

After our first lender pretty much told us we couldn't do either loan, we decided to find a new lender. Our new lender worked for a smaller bank, which allowed him to have more flexibility and to offer more products to choose from and qualify for. Our new lender told us that there was other options and we could make it work. He told us about the 80-10-10 loan. This is similar to a conventional loan except now we only have to put 10% down (instead of 20%), then we have one mortgage that is 10% at a higher interest rate, and a second mortgage at 80%.
This type of loan allowed us to dodge the mortgage insurance and our second loan, the 10% one, ended up being cheaper than the mortgage insurance we would have paid had we gone with an FHA loan.
The only problem was that we weren't quite planning on putting 10% down on a house.... but I really wanted this house, so we re-arranged our budget and pulled money from savings to make it work.