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What are four types of home loans you can receive?

Most people aren’t in a position to pay cash for a house, so a mortgage is often the only way to buy one. But with so many different types of home loans – tailored to different types of buyers – you might ask: Which home loan is right for me?

Even though your lender or loan advisor can help with this question, knowing your options “before” actively starting the mortgage process only serves to your advantage. This can prevent information overload during the first meeting with a loan officer. Plus, when you’re familiar with the guidelines and requirements for various programs, you’re able to prepare sooner.

Now, there’s no shortage of home loan options when buying a house, and we can’t cover every single option in this blog post. So today we’re focusing on four common mortgage loans: conventional, FHA, VA, and USDA.

What is a conventional loan?

A conventional loan is probably the most common type of home mortgage loan. Just about every lender offers these, and it’s estimated that they make up more than 80% of the market share. 

They generally have lower costs compared to other loan programs and they offer more flexibility. You can use a conventional loan to buy a primary residence, investment properties, and a vacation home. For this post, though, the focus is on a primary residence. 

The first thing you need to know about a conventional loan is that you don’t need a very high credit score to qualify. Now, the higher your credit score the easier it is to get approved, and you’re able to get a favorable rate. 

However, these loans typically only require a minimum credit score of 620 to 640 (some lenders might require a minimum score of 680).

Another bonus is that you’re able to qualify with a low down payment. The minimum down payment with a conventional will range from 3% to 5% depending on the specific type of loan.

A Conventional 95 loan (also referred to a standard conventional) requires 5% down, whereas Conventional 97 loans only require 3% down. These include Fannie Mae’s HomeReady & Freddie Mac’s Home Possible loans.

Keep in mind, buying with a low down payment will require paying private mortgage insurance (PMI). This is often required when buying a home with less than 20% down. It protects your lender in the event of default.

The good news is that PMI isn’t permanent. Your lender will remove this insurance once the property has between 20% to 22% equity.

What is an FHA loan?

This is another types of home loan, and a popular choice – especially among first-time homebuyers and those with past credit problems.

An FHA mortgage is a government loan backed by the Federal Housing Administration. But the FHA isn’t a bank, so it doesn’t create loans. The agency only insures them. Therefore, you’ll apply for financing through an FHA-approved mortgage lender.

These loans are favored because of their low credit score and down payment requirements. In most cases, you can get an FHA loan with a score as low as 500 to 580. However, your credit score does affect your down payment.

Borrowers with a credit score 580 and higher only need a down payment of 3.5%. But if your score is lower than 580, you need a 10% down payment. And similar to conventional loans, you’ll pay FHA mortgage insurance if you purchase with less than a 20% down payment.

Unfortunately, though, FHA mortgage insurance is for life. The only exception is when a borrower puts down at least 10%, in which case they’ll only pay mortgage insurance for 11 years. Otherwise, they would have to refinance the loan once the property has 20% equity.

FHA loans are for first-time homebuyers and repeat buyers. But unlike conventional loans, you can only use the loan to buy a primary residence. You can’t buy a vacation home or an investment property with an FHA loan.

The only exception is if you buy a 1 to 4-unit multi-family home. You can live in one of the units and rent out the others.

What is a USDA loan?

This is a government loan insured by the U.S. Department of Agriculture. However, USDA loans are unique because you must purchase the home in an eligible rural area.

But this doesn’t imply living in the middle of nowhere – several rural areas located on the outskirts of metro areas qualify. To see whether an area qualifies, check the USDA property eligibility map.

The biggest perk is that a USDA loan is a zero-down mortgage program, which removes a huge obstacle to homeownership. But, of course, buying with less than 20% down comes with a price.

USDA loans don’t technically have mortgage insurance. Instead, you’ll pay a guarantee fee which is similar – and this fee is for life. To remove it, you must refinance into a different loan program.

This program often requires a minimum credit score of 640, it’s only for one-unit owner-occupant properties, and your income can’t exceed 115% of the median income or your area.

What is a VA loan?

This is also a government loan, but it’s only available to active-duty military, veterans, other select service members, and their eligible spouses.

VA loans are backed by the Department of Veterans Affairs and they offer a lot of perks. For starters, the VA doesn’t set a minimum credit score to qualify. Every lender establishes their own minimum, with these ranging between 620 and 660.

It’s also a zero down program. But unlike other mortgages that require some form of mortgage insurance, you don’t pay mortgage insurance with a VA loan.

Now, being a veteran or service member doesn’t mean you’ll automatically qualify. You must meet the minimum service requirements. And if you do, you’ll need to obtain a VA Certificate of Eligibility. You can get it through the VA or your lender.

This confirms that you’re eligible for the program, and it includes information about your entitlement. This is the amount the VA will pay your lender if you default.

You must also use a VA-approved lender and the property must be a primary residence. If you buy a multi-unit home, you must live in one of the units.

I hope you found this helpful. And again, this is only” basic” information about four common home loans. Some lenders also offer specialized programs based on unique circumstances. Therefore, this is by no means an exhaustive list. So talk with your lender to discuss other types of home loans available to you.