While many people start the homebuying process with the exciting home search, taking a look at mortgage loan options first can help you zero in on the right home faster.
To help you determine your financing options, we have pulled together the most common loan types borrowers use to purchase their first home.
What's in this article?
Let’s take a look at the different types of home loans, from conventional and VA loans to term lengths, rate options, and requirements.
What are the different types of home loans?
The most traditional loan option most people are familiar with is the 30-year fixed-rate conventional mortgage.
However, this is far from your only loan option.
Depending on your lender, you will be able to choose your loan type, term length, and whether the interest rates are fixed or adjustable.
We’ll dig into all these options, starting with the most common loan types and which types of borrowers are best suited for these options.
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Conforming vs. non-conforming loans
Mortgages are grouped into either conforming or non-comforming loans.
Conventional mortgages, for example, can be conforming loans, which means they are bought by Fannie Mae or Freddie Mac.
These entities are government-sponsored mortgage companies that set the guidelines and regulations for conforming loans. For Fannie Mae or Freddie Mac to purchase a loan, it must meet their guidelines.
Conforming loan requirements include:
- Maximum loan amounts
- Loans are NOT backed by the government, such as an FHA loan
- Meets specific lender criteria, including credit score, property, and income guidelines
These types of loans are considered less risky than non-conforming loans because they are backed by Fannie and Freddie’s guidelines.
Non-conforming loans, then, have less strict requirements than conforming loans.
Conforming conventional loans are the most common mortgage loan type.
They are backed by Fannie and Freddie, and have more strict credit score and income requirements than many other loan types.
However, in return for these stricter requirements, borrowers who qualify for conventional loans have many loan options, and can use this type of loan to purchase primary residences, vacation homes, investment properties, and more.
How to qualify for a conventional loan
To qualify for a conventional loan, borrowers generally must provide the following:
- Higher credit scores
- Lower debt amounts
- Income verification
- Employment history
- Proof of debt, assets, and down payment amount
Borrowers who are able to pay a 20% down payment for their home don’t have to purchase private mortgage insurance (PMI).
However, if you are unable to pay 20%, you may be able to put down as little as 3% and pay for PMI until you reach 20% equity in your home.
If you have a good credit score and can make a strong down payment, a conventional loan may be right for you.
The next three types of loans are all government-backed loans. These types of loans are insured by government agencies, not backed by Fannie or Freddie.
FHA loans are backed by the Federal Housing Administration, and allow borrowers to purchase a home even if they have lower credit scores and can’t afford a large down payment.
This type of loan makes owning a home possible for thousands of borrowers who can not meet conventional requirements.
How to qualify for FHA loans
Some borrowers are able to get a home with a credit score as low as 500, depending on the lender and the down payment amount they are able to provide.
Generally, FHA loan requirements are as follows:
- 3.5% down payment with credit score of 580 or higher
- 10% down payment with credit score of 500-579
- Higher debt-to-income (DTI) ratio allowed
- Home must be primary residence
Borrowers must pay mortgage insurance premiums (MIPs) with FHA loans. Depending on the down payment amount, borrowers may have to pay them for the life of the loan.
MIPs make FHA loans possible, by funding FHA operations and allowing the opportunities to continue.
VA loans are backed by the Department of Veterans Affairs, and provide significant benefits to borrowers who meet the specific criteria.
These loans have flexible requirements, low interest rates, and do not require a down payment or mortgage insurance.
How to qualify for a VA loan
To qualify for a VA loan, you must meet the following requirements:
- Be an active service member, veteran, or surviving spouse
- Provide certificate of eligibility from VA
- Home must be primary residence
Closing costs and fees can be rolled into the loan, and, depending on the lender, a lower credit score may be allowed.
USDA loans are backed by the Department of Agriculture.
This loan type is meant to help low-to-moderate-income borrowers buy a home in a rural area.
How to qualify for a USDA loan
USDA loans require borrowers to provide the following:
- Higher credit score
- Income requirements
- Home must be purchased in a USDA-eligible area
- Upfront and annual fees
Some USDA loans don’t require a down payment.
Jumbo loans are not government-backed, but they are non-conforming.
Borrowers who need jumbo loans want to purchase a high-value property that exceeds the conforming loan limits.
They have stricter requirements than other loan types due to the higher value and higher risk.
How to qualify for jumbo loans
Jumbo loans generally require the following, depending on the lender:
- Credit score of 700 or higher
- Proof of significant assets in cash or savings accounts
- Larger down payments of 10% to 20%
- Low DTI
It can sometimes be more difficult to find lenders willing to offer jumbo loans due to the higher risk.
Fixed rates vs. adjustable rates
Fixed-rate mortgages have the same interest rate over the life of the loan, while adjustable rates adjust based on the current market rate.
Generally, an adjustable rate will have a lower introductory rate period, and when the period ends, the rates adjust accordingly.
Fixed-rate loans generally come in three terms: 10-year, 15-year, and 30-year. Some lenders offer 20-year terms or 40-year terms, depending on the loan type.
Each term option depends on a homeowner’s short and long-term goals, and can change if they decide to refinance their mortgage in the future.
Shorter terms generally equal higher monthly payments, while longer terms result in lower monthly payments.
Which mortgage loan is best for me?
The best mortgage loan for you is based on your personal finance and goals.
The first step to determining the best loan type for you, and which loans you qualify for, is to find a trustworthy mortgage lender.
At Compass Mortgage, our core values set us apart from the rest.
We are “Home to a Better Mortgage Experience” because we thrive in a family-like atmosphere, and invite you to join our family.
Reach out to our team today to get started. We promise to go above and beyond to help you reach your homeownership goals.