By Bernard Freeman
Getting pre-approved for a mortgage is often one of the first steps you take when deciding to purchase a home.
There are a lot of financing options out there and it can get confusing quickly. Here’s a rundown of some of the most common types of mortgages out there and what you need to know about each one.
Conventional loans are mortgages that are not insured or guaranteed by the federal government. These are usually fixed-rate mortgages and, because they have stricter requirements, are usually some of the hardest to qualify for. Conventional loans typically require a bigger down payment, a higher credit score, lower debt-to-income ratios and could also require private mortgage insurance.
The upside is that these loans are usually less expensive than the loans guaranteed by the government.
Federal Housing Administration Loans
The Federal Housing Administration also provides several mortgage choices. Typically, these have lower down payment requirements and are easier to get than conventional loans. These are great choices for first-time home buyers because they have lower up-front cost and less stringent credit requirements. Down payments on FHA loans can be as little as 3.5% of the home’s purchase price.
That said, FHA loans require mortgage insurance to protect the lender should the borrower default, die or is otherwise unable to meet the obligations of the mortgage.
Veterans Affairs Loans
FHA isn’t the only government agency that guarantees loans. The Department of Veterans Affairs guarantees some mortgages to allow veterans to obtain home loans with favorable terms, sometimes even without a down payment. Like FHA loans, these loans are easier to qualify for than conventional loans for qualified buyers.
Also called adjustable-rate mortgages or interest-only mortgages, these loans are the most help to first-time home buyers or to buyers who expect their incomes to rise substantially. As a borrower, you usually get a lower introductory rate for the first few years of the loan. That means you can qualify for more money than if you tried to get another kind of loan. These loans can be risky if your income doesn’t grow as fast as your interest rate rises.
Types of Insurance
Once you’ve found your perfect home, you need to protect it.
There are lots of different homeowner policies out there, each for the kind of home you purchase. There are policies for single-family homes, condos and more. Keep reading to learn more about each type of policy.
This is your basic homeowner policy. It covers your home, any attached structures such as garages, appliances and some features of your home. It’s a named perils policy. That means it covers you in specific situations, which may include damage from vehicles, explosions, fire and lightning, hail and windstorms, riots, smoke, theft, vandalism and even volcanic eruptions.
HO-2 policies may also be called a broad form. This covers your home and your personal belongings — most of the time no matter where they are. They may include liability coverage. Like an HO-1 policy, HO-2 insurance covers named perils. They may also include accidental discharge or overflow of water or steam; tearing apart, burning and cracking from some household systems; freezing of pipes and heating and air conditioning systems; sudden and accidental damage from electrical currents; a falling object; or weight from ice, snow or sleet.
The most common type of homeowners is the HO-3 special form policy. It covers your home, personal property, liability and additional living expenses and medical payments.
The perils it covers generally exclude defective construction or maintenance; foundation issues; government actions; pet or animal damage; pollution and corrosion; theft, vandalism and frozen pipes in vacant houses; wear and tear; flood, earth movement; war; nuclear hazard; intentional loss; neglect; mold, fungus or rot; power failure; ordinance or law; mechanical breakdown; smog, rust or corrosion; birds, rodents and other creatures; and any animals owned by the insured.
These policies are commonly called renters insurance. You can get these when you’re renting property and want to cover your personal belongings and get liability and additional living expenses. Renters insurance policies are usually named perils policies that cover events covered by HO-1 and other policies.
This is the most comprehensive policy available and covers your home, personal belongings, liability, additional living expenses and medical payments for others. They can also have higher limits for things such as jewelry and are recommended if you have high-value items. These policies protect you from anything not specifically excluded in your policy. Common exclusions are things like earth movement, government actions or laws, mold, nuclear hazards, war and more.
HO-6 insurance is for condo owners and covers everything inside your unit, personal liability and additional living expenses. They also usually include dwelling coverage. Condo homeowners’ associations usually have their own policies that cover the common areas, grounds and external parts of the building. The owners in the building help pay the association’s fees as part of their HOA fees.
Renovation Projects that Pay
If you’ve spent the pandemic looking around your home and deciding you need something different, you might be pondering a move up.
To maximize what you get for your home, you might be pondering a few renovation projects. Here are the projects that net you the biggest return on your investment according to HGTV.
The average homeowner spends about $4,000 on landscaping, the American Nursery Landscape Association says, and HGTV says your average return is 100%. Add new sod to the front yard and pick native flowering plants for a pop of color at the front of the house. Nix overgrown shrubbery and mix the heights of foliage for a dramatic effect.
New vinyl siding, paint and updating the front entry will run you a little more than $7,000 and you’ll get about 95% of it back. Use paint color cards to choose color combinations. Make sure you test for lead before painting or sanding if your home was built before 1978. It could have lead in the paint, which can be harmful to humans.
Attic Bedroom Conversion
Got room upstairs? HGTV says it will cost you around $40,000, but you’ll get about 94% of it back. You need to make sure there’s plenty of insulation to lower your utility bills and that your existing HVAC can handle the load.
Major Kitchen Remodel
The kitchen is the heart of the home and it will run you about $45,000 for a major renovation that covers new cabinets, an island, countertops, sink, appliances and flooring. HGTV suggests removing over-counter cabinets and making countertops work for you by creating an eating bar. Stick with neutral colors to get the most bang for your buck.
This job will cost you around $10,000 and you’ll get around 90% of that back. New windows can make your home more efficient and save on utility bills for either you or your home’s new owners. Side note: You may not recoup that much in hotter climates. In Las Vegas, for instance, you’ll only get around 60% of your investment back.
Living Room Updates
Giving your living room a facelift with new decor including light switches, outlet covers, floor registers and more will cost you about $2,000. You should expect to get about 60% of that back. If you’re following up this renovation with a sale, stage your home by moving excess furniture and clutter to storage.