Finding the Best Type of Home Loan for Your Needs

What type of home loan is the best option for you? 

There’s not one single type of loan that’s best. Instead, your best options will vary based on your circumstances. Since different home buyers have different preferences, you’ll want to work alongside a loan advisor to find a mortgage program that’s in line with your needs. 

There are many different options available to buyers today. If you’re ready to buy a house, and you’d like to find a loan program that’s a good fit for you, you can find more information below. Your primary goal is to find a lending solution that will allow you to buy a home without breaking the bank. There are many different ways to get there, and being able to compare home loans side by side is a huge advantage. 

Where to Start Looking for a Mortgage 

Different home loan programs are targeted towards different types of buyers, which means they have different advantages. You should focus on finding a loan that’s in line with what you’re looking for. 

As you go over different kinds of loans, you should take certain things into consideration.

Ask yourself questions like: 

  • Which loan requires the lowest upfront payment? 
  • Which loan will be the least expensive overtime? 
  • Which loan offers the most affordable monthly payment? 
  • What kinds of loans are available to someone with my credit score? 
  • What kind of impact does my income have on my loan eligibility? 
  • What price range am I buying in? 
  • How long will I be staying in the home that I buy? 

If you go over your answers to these questions, you’ll be able to get a better understanding of different mortgage types and how well these solutions might work for you.

What Are the Different Types of Home Loans? 

Conventional Loans 

This is one of the most popular types of mortgages for home buyers, and for good reason. These loans have flexible terms, excellent rates, and offer a range of options for down payments. 

It’s common for some types of conventional mortgages to be referred to as “conforming loans.” This term means that the loan confirms with Fannie Mae and Freddie Mac standards. The majority of lenders in the United States offer this loan type. You can get these loans from mortgage companies, banks, and credit unions, and the rates on these loans are often very competitive. You’ll need to have a credit score of 620 or higher in order to obtain a conventional loan from these lenders. 

Another advantage of this type of loan is that your down payment and credit score determine your mortgage rate. This means that you’ll be able to get a better deal if your finances are in great shape. 

Benefits of Conventional Mortgages: 

  • No mortgage insurance fees upfront 
  • Buyers can choose between fixed and adjustable and fixed rates 
  • Buyers can secure loans with down payments as low as 3% 
  • Loan terms range from 10 to 30 years 
  • Borrowers can receive loans upwards of $548,250 
  • With 20% equity, you can cancel Private Mortgage Insurance (PMI) 
  • Loans available for primary residences, vacation homes, second residences, and investment properties 

Conventional Mortgage Drawbacks: 

  • If the down payment is below 20%, PMI is required 
  • Interest rates are higher when the borrower’s credit score is low 
  • Interest rates will be higher if your down payment is smaller

FHA Home Loans 

This type of loan is particularly popular with people that are buying a home for the first time. They offer a number of benefits that make them particularly appealing to new home buyers. 

The requirements for down payments are low, as are the credit score requirements. Furthermore, income guidelines are very flexible. For many people, FHA mortgages are what puts home ownership in reach. 

These loans have more lenient income and credit guidelines because they are backed by the Federal Housing Administration. The interest rates on these loans also tend to be low. 

FHA Loan Benefits: 

  • The down payment requirement is just 3.5% 
  • A credit score of 500 is required with 10% down, and a score of 580 is required with 3.5% down. 
  • It’s possible to use down payment assistance or gifts to cover the down payment and closing costs in full. 
  • Income qualifications are lenient 
  • 15 and 30-year loan terms are available 
  • Both adjustable and fixed-rate mortgages are an option 
  • FHA loans can be used to purchase one to four-unit residential homes, and additional units can be rented out providing that you live in the property 

FHA Loan Drawbacks: 

  • Both upfront and monthly MIPs are a requirement 
  • Even with 20% home equity, you cannot cancel mortgage insurance 
  • Limitations for loans are more limited, with maximum loans of $356,362 in most areas 
  • Loans can only be used to purchase a primary residence 

VA Loans 

If a buyer has served in the military, they could qualify for a loan that requires zero down payment and is backed by the U.S. Department of Veterans Affairs. 

These mortgages are considered by many to be one of the best types of home loans available. Monthly mortgage insurance is never a requirement, and rates are lower than they would be with standard loans. 

If buyers have U.S. military service history, this loan should be their top consideration. Veterans, service members on active duty, and the surviving spouses of military members are eligible for these loans. 

VA Loan Benefits: 

  • Mortgage rates are extremely low 
  • Down payments aren’t necessary 
  • Mortgage insurance isn’t required 
  • Credit score requirements are lax 
  • Both 15 and 30-year fixed-rate loans are an option 
  • Adjustable-rate loans are available 
  • Loans can be used to purchase one to four-unit homes, and additional units can be rented out provided that you live on the property 

VA Loan Drawbacks: 

  • Only buyers with a service history qualify 
  • Borrowers must pay an upfront funding fee between 1.4% to 3.6% of the total loan. However, this fee can be included in the mortgage 
  • These loans can only be used to purchase a primary residence

USDA Loans

The home mortgage program backed by the U.S. Department of Agriculture is referred to by a range of names, including Single-Family Housing Guaranteed loans, Rural Development loans, and of course, USDA loans. 

This loan is aimed at buyers with a low to moderate income. In order to take advantage of the loan program, buyers must purchase a home in a suburban or rural area. The program eliminates the down payment requirements, making homeownership more accessible to many buyers. Mortgage insurance and interest rates are also reduced. 

USDA Loan Benefits: 

  • Down payments aren’t necessary 
  • Mortgage insurance fees are low 
  • Mortgage rates are below market rate 
  • Loans are available to buyers with credit scores of 640 or higher 
  • There are no limits on loans 

USDA Loan Drawbacks: 

  • The property must be an area that the USDA classifies as rural 
  • 30-year fixed rate loans are the only option available 
  • Household income limits must be met 

Non-Conforming Loans 

What happens if you live in an area where home prices are high? 

The loan limits for conventional loans are fairly high, with limits of $548,250 in most areas. In some areas, limits may be even higher. Unfortunately, in some areas with high real estate values, that amount still isn’t enough to purchase a home. Non-conforming loans, which are sometimes referred to as jumbo loans, aren’t subject to the loan limits set by Fannie Mae and Freddie Mac. It’s possible to receive jumbo financing for millions. 

You may assume that interest rates will be a buyer if you’re borrowing more. However, the rates for non-conforming loans are similar to the rates for conventional loans. In some cases, they may even be lower. Of course, in order to be approved for these loans and get a low rate, you’ll need a high credit score. 

Non-Conforming Loan Benefits: 

  • Loans can be used to buy real estate at a higher price point 
  • Both adjustable and fixed rate loans are an option 
  • Loan rates tend to be competitive 
  • 5 to 10% down payments are an option 

Non-Conforming Loan Drawbacks: 

  • A FICO score of 680 or higher will be necessary in most cases 
  • Buyers may need large cash reserves 
  • When borrowing more, monthly payments are likely to be higher

FHA 203K Rehabilitation Loans

You can buy a home for less if you buy an older property in need of renovations or repairs. Of course, in order to do this, you’ll need to have money to cover the cost of renovations. You can get the funds you need from a 203k loan. This FHA mortgage is designed to let you borrow the money you need to purchase a property and the funds you need for repairs. 

There are many properties on the market that are in poor condition, including short sales, foreclosures, and properties that are on the open market. Significant repairs are often necessary before these properties qualify for financing. Unfortunately, in most cases, it isn’t possible to start renovating a home you haven’t purchased. 

FHA 203k mortgages provide a solution to this. You can purchase the home in its current condition and borrow additional money that will cover the cost of repairs and renovations. In many cases, buyers gain quite a bit of equity from these changes. 

FHA 203K Loan Benefits: 

  • You can finance a property purchase and renovations simultaneously 
  • Buying a fixed-upper is a great way to save 
  • Bundling everything into a single loan means you’ll have less hassle and fewer closing costs 
  • Borrowers can receive up to $35,000 to put towards repairs and renovations 
  • Income eligibility and credit score requirements are lax 

FHA 203k Loan Drawbacks: 

  • You’ll be required to pay monthly MIPs as well as upfront payments. 
  • FHA loan limits apply 
  • Luxury improvements are not permitted 

Adjustable-Rate Mortgages 

30-year fixed rate loans are the most popular options for buyers. These loans keep monthly costs low and also keep costs stable. However, if you intend to live in your property for fewer than 10 years, an adjustable-rate mortgage (ARM) could be a better option for you. 

These mortgages have a fixed interest rate initially, but this rate only lasts for a period of time. Once that point has passed, the rate will rise with the market. However, if you intend to refinance or move before you reach that point, you won’t need to be concerned that your rate will go up. 

ARM loans typically have an introductory rate that are below the rate for 30-year fixed mortgages. In spite of that, the rate will be fixed for a pre-specified period of time. 5, 7, and 10 year periods are all common. An ARM loan could lead to significant savings. Furthermore, caps are built into ARMs. These safeguards place limits on how much your rate can rise. 

Adjustable-Rate Mortgage Benefits: 

  • For up to 10 years, you’ll be able to pay a much lower rate 
  • You could save thousands in interest during this time 
  • You’ll have ample time to sell the property or refinance before the rate is adjusted 

Adjustable-Rate Mortgage Drawbacks: 

  • Both your monthly payment and rate can increase once the fixed-rate period has passed 
  • If you’re not confident that you’ll move or refinance before the period ends, you’ll be taking on a significant risk 

Choosing the Right Home Loan 

While selecting your mortgage can be complicated, you won’t have to figure things out on your own. You’ll have a mortgage broker or loan officer assisting you throughout the process, which means you’ll be able to make the best possible choice. 

With that said, you should be aware that your options will be limited based on the broker or lender you work with. Even if you qualify for a USDA mortgage, your lender may not mention this to you if they don’t provide this type of loan. This is why you’ll want to find out more about your choices on your own. 

Look at the loan types listed above and identify the options that are most suitable for you. Bring this up to your loan advisor. They can work with you to compare initial fees, long-term costs, loan rates and requirements so that you can find the best solution for your home purchase.