Are you interested in purchasing a new home and not sure which type of home loan to apply for or what different options there are out there? See which one makes the most sense for you!
There are various types of regulations, guidelines, and fees out there for the home buying process. Not every mortgage is right for everyone. That is why there are a variety of home loans available. Let’s look at the various options out there.
1. Conventional Loan:
- What Is It? A conventional loan is a loan that isn’t backed by a government agency. These are the most common type of loan. Conventional loan terms come in 10-, 15-, 20- and 30-year terms, with 30-year terms being the most popular option.
- What Do You Need? You can get a conventional loan with as little as 3% down payment and a 620 credit score. But the lower your credit score, the more money you might need for a down payment.
- Who Is It Good For? The majority of home loans — around 75% — are conventional loans, so it’s good for most people. You can use it for your first home, second home and even investment properties.
- Who Should Skip It? Borrowers who don’t have the minimum credit score requirements or need payment assistance.
2. FHA Loan:
- What Is It? An FHA loan is backed by the Federal Housing Administration, which provides mortgage insurance to lenders who provide FHA loans. It’s the largest mortgage insurer in the world. Loans are administered by FHA-approved lenders. This can be local banks, credit unions and online lenders. Loans come in 15- and 30-year terms.
- What Do You Need? To secure a 3.5% down payment rate, your credit score will need to be 580 or above. If it’s below 580, you can still qualify, but you’ll need at least a 10% down payment. For down payments of less than 20%, your loan will require private mortgage insurance. PMI protects the lender just in case you default on your loan. PMI will get removed from your mortgage payments once you have at least 20% equity in your home.
- Who Is It Good For? Borrowers who don’t have strong enough credit to qualify for a conventional loan. FHA loans also offer down payment loans and grants through federal, state and local programs whereas conventional loans don’t.
- Who Should Skip It? If you have good or excellent credit that would qualify you for a conventional loan.
3. VA Loans
- What Is It? VA loans are offered through the US Department of Veterans Affairs. Military veterans, those in active duty or in the reserves qualify for VA loans.
- What Do You Need? There’s no down payment or minimum credit score requirement to get a VA loan.
- Who Is It Good For? Those who serve or have served in the military.
- Who Should Skip It? Borrowers who aren’t in the military, obviously. VA loans are only good on primary residences so if you need funding for a second home or investment property, you’ll need to look at other options.
4. USDA Loans
- What Is It? USDA loans are funded by the US Department of Agriculture. They’re available in specific regions across the country. They’re made for borrowers in mostly rural areas who might not otherwise qualify for a traditional loan. Loans are backed by USDA-approved lenders (similar to FHA-backed loans).
- What Do You Need? There’s no down payment required for a USDA loan. Most lenders require at least a fair credit score.
- Who Is It Good For? Families in rural areas as long as you meet income and location limits.
- Who Should Skip It? Those who don’t meet the location and income requirements. If you qualify for one and not the other, you also might want to look into alternative loan options.