6 Types of Home Loans

Purchasing a home is a life-altering decision. As a buyer, it’s critical to understand the different types of home loans available and which one will work best for you. Your lender can help you decide which loan is right for you, based on your financial, regional and lifestyle factors.

Below are the six most common types of home loans available.

1. Conventional Loan

A conventional mortgage is a loan that is not backed by specific government agency. Conventional loans are also called conforming loans because they conform to Fannie Mae and Freddie Mac standards. You need to have a higher credit score (generally a minimum credit score of 620 or higher), lower debt-to-income (DTI) ratio and down payment to qualify. Conventional loans are available at fixed rates and ARMs. Common loan terms for conventional loans and most other types of mortgages range 10 – 30 years.

Pros:

  • Low down payment options available

  • No PMI when 20% is put down

  • Can use to purchase primary residence, vacation home or rental property

Cons:

  • Higher credit score required for approval

  • DTI (debt-to-income ratio) typically can’t be above 43% for approval

2. Federal Housing Authority (FHA) Loan

FHA loans are government-insured loans backed by the Federal Housing Authority. They are designed for low- to moderate-income earners and typically come with the lowest down payments. Higher debt-to-income ratios are allowed, and borrowers need only a 3.5 percent down payment. Borrowers can have as low as a 580 credit score and still qualify for an FHA loan.

PROS:

  • Low down payment

  • Competitive interest rates

  • Higher debt-to-income ratios allowed

  • Lower credit scores allowed

CONS:

  • Lower loan limits

  • Mortgage Insurance Premiums (MIP) is required for the life of the loan

3. Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage is a loan where the interest rates adjusts over time, typically along with changes in market interest rates.

There is usually a fixed portion of the mortgage, for instance, a 5/1 ARM means the rate is fixed for the first 5 years (which means your payment is the same), then adjusts annually depending on interest rates.

PROS:

  • Lower initial rates

  • Lower monthly payments in the early years

  • Great for borrowers who are confident in predicting the length of their residency

CONS:

  • Interest rate may fluctuate

  • Monthly payments may increase

  • Depending on future adjustments, interest costs may exceed the fixed rate option

4. Veteran’s Affairs (VA) Loan

A VA loan is backed by the Department of Veteran’s Affairs. It is typically a 0% down loan with no PMI. However, there are very strict requirements to getting a VA loan. For one, you need to be a veteran or active duty service member with 90 consecutive days of active service during wartime or 181 days of active service during peacetime.

You can also get a VA loan if you have served for the National Guard for more than 6 years, or you are the spouse of a service member who died in the line of duty.

PROS:

  • No down payment required as long as the sales price doesn’t exceed the appraised value

  • No private mortgage insurance required

  • VA rules limit the amount a borrower can be charged for closing costs

  • A borrower does not have to be a first-time homebuyer

  • No prepayment penalties

  • Benefit is reusable

  • Low interest rates

CONS:

  • VA home loans require a funding fee

  • Cannot be used for an income property

  • Must meet certain service requirements

5. US Department of Agriculture (USDA) Loan

A rural housing loan, also known as a USDA loan, is backed by the U.S. Department of Agriculture and is designed to encourage homeownership in America’s more rural and remote locations.

PROS:

  • No down payment

  • No prepayment penalties

  • No limit on cash contributions

  • 100 percent financing

CONS:

  • Limited to certain geographic areas

  • Requires private mortgage insurance

  • Some income limits may exist

  • Limited to owner-occupied homes only

6. Jumbo Loans

Jumbo loans are best for high-income earners with good credit and their eye on a higher-end home. A jumbo loan mortgage is any home loan that is more than the 2022 conforming limit of $647,200 according to Fannie Mae guidelines on conventional mortgages.

PROS:

  • Available in fixed and adjustable rate options

  • Large loan limits

CONS:

  • Only available for primary homes, not secondary, vacation, or investment properties

  • Requires a high credit score

  • Requires 20 percent down

BuyersStacia Klimbuyer, home loans