When you’re ready to buy a home, you have some big decisions to make including what type of financing you’ll get. Depending on your qualifying factors, you may have different options for mortgage loans, but understanding the best type of home loan for you will help you make the most of your purchase.
What are the Different Types of Loans?
Before you decide which loan is right for you, it’s important to learn about the different types of loans available.
Multiple loan programs may work for you, so understanding how they work, and who qualifies will help.
Conventional loans are the ‘standard mortgage loans’ most people think about when thinking about a mortgage.
You need 3% - 5% down, a decent credit score, and good qualifying factors. Here’s what conventional loans require:
Minimum 660 credit score
Maximum 36% debt-to-income ratio (sometimes up to 43% is allowed)
Consistent income over the last couple of years
Minimum 3% down for first-time buyers and 5% for those who’ve owned a home before
If you don’t put 20% down on the home, you’ll pay Private Mortgage Insurance, but you can have it canceled once you owe less than 80% of the home’s value.
FHA loans are government-backed loans that are good for borrowers who don’t qualify for a conventional loan. The government guarantee on FHA loans allows lenders to offer more flexible guidelines including:
Minimum 580 credit score
Maximum 43% debt-to-income ratio
Consistent income for the last 2 years
Only for owner-occupied homes
Minimum 3.5% down
FHA loans require borrowers to pay for mortgage insurance. This lasts for the loan’s entire term and is 0.85% of your outstanding principal balance. The premium decreases each year as your principal balance decreases.
VA loans are a part of a program for military veterans. This government-backed loan doesn’t require a down payment and has the most flexible guidelines, but again, it’s only for veterans of the military. Here’s how VA loans work:
Minimum 620 credit score
Maximum 43% - 50% debt-to-income ratio
Adequate disposable income
The home must be your primary home
Stable income and employment for 2 years (or an offer letter if you’re recently discharged)
VA loans don’t require mortgage insurance, but they do charge a funding fee that most veterans pay at the closing unless you were rendered disabled in the military, or you are a veteran’s surviving spouse who lost their lives in the military.
USDA loans are loans for low to moderate-income families who don’t qualify for any other type of mortgage financing. You also cannot own your own home. You must buy a home in a ‘rural’ area according to the USDA guidelines and meet the following requirements:
Your total household income must not exceed 115% of the area’s median income
Minimum 640 credit score
Maximum 41% debt-to-income ratio
The home must be your primary home and you cannot own any others
Consistent income over the last couple of years
Proof you cannot secure any other financing
USDA loans charge an upfront funding fee plus mortgage insurance monthly. The mortgage insurance rate is just 0.35% of the loan amount, though, and decreases each year as you pay the balance down.
Choosing the Best Type of Home Loan for You
So how do you choose the best type of home loan for you?
Ask yourself these questions:
Do I have good credit?
If you have good to great credit, consider a conventional loan. The higher our credit score is, the easier it is to qualify. You’ll get competitive interest rates and fees, and you can cancel any mortgage insurance once you owe less than 80% of the home’s value.
If you don’t have good credit, a government-backed loan is a better option, with the FHA loan the most common ‘replacement’ for conventional loans.
Am I eligible for a VA loan?
If you served in the military, consider a VA loan. Even if you make a down payment, it’s still a great loan program with flexible requirements and low rates and fees for those that served our country. If you can’t afford the upfront funding fee, you can wrap it into your loan.
Is my household income below the median for the area?
If your household income is below the median for the area, a USDA loan can be your only option. While it’s only for homes in ‘rural’ areas, you might be surprised to learn what the USDA considers rural. It’s basically areas outside of the city lines with low population. You aren’t stuck living out in the middle of nowhere.
What’s the total cost?
No matter what types of mortgage loans you’re eligible for, always look at the bottom line. Ask what the loan’s total cost is at the end of the term. Even loans that seem like a ‘great deal’ might cost more than you think. Use the bottom line to compare your options and make sure you’re getting the best deal for your loan.
You can't help but find the best house loan for your situation when you work with the top mortgage broker. We work with borrowers in many situations, helping them secure the best loan program for their own unique situations.
We look at your income, assets, employment, and credit score to help you decide what’s right for you. Every loan program we match our borrowers with is the one that suits their financial needs the most. We know the stress of finding the right loan program and understanding how it works – we’re here to do the legwork for you so that you acquire the financing you need.