Applying for your first mortgage loan can be an intimidating task. If you aren’t an experienced real estate professional, how are you supposed to know which loan is right for you? Fear not, because we’re breaking down the differences between each of the major loan types.
Conventional Loan
Conventional mortgage loans are the most common kind available (as the name would suggest), as well as the most popular. They are funded by private lenders, unlike the government-backed loans that are next on this list. They are a beneficial choice of loan for buyers with a stable income, good credit, and enough money for a moderate down payment.
Pros:
- The total loan amount after fees, insurance, and interest will often be lower than other types of loans
- Flexible repayment options (adjustable rates, shorter terms)
- No upfront mortgage insurance fee
Cons:
- Must pay for private mortgage insurance if your down payment is below 20%
- Stricter qualifications (credit score, debt-to-income ratio) than other loans
Requirements to qualify:
- A credit score of at least 620
- A debt-to-income ratio below 43%
- A 3% minimum down payment
FHA Loan
FHA loans have been helping people become homeowners since 1934. How is it done? The Federal Housing Administration (FHA) – which is part of the U.S Department of Housing and Urban Development (HUD) – insures the loan, so your lender can offer you a better deal.
Pros:
- Low down payments
- Low closing costs
- Easy credit qualifying
Cons:
- Lower loan limits
- Must pay a monthly mortgage insurance premium for the life of the loan
Requirements to qualify:
- A 3.5% down payment if your credit score is 580 or higher
- A 10% down payment if your credit score is 500-579
- A debt-to-income ratio of 50% or less
- Documented, steady employment and income
- Must live in the home as your primary residence
- Must not have had a foreclosure in the last three years
VA Loan
The VA home loan was created in 1944 by the United States government to help returning service members purchase homes without needing a down payment or excellent credit. This historic benefit program has guaranteed more than 24 million VA loans, helping veterans, active-duty military members, and their families purchase or refinance a home. VA loans are issued by private lenders, such as a mortgage company or bank, and guaranteed by the U.S. Department of Veterans Affairs (VA).
Pros:
- $0 down payment available
- Private mortgage insurance not required
- Lower interest rates than many other loans
Cons:
- This option is only available to veterans, service members, and select military spouses
- Must pay VA funding fee (can be financed into loan)
Requirements to qualify:
Like all home loans, VA mortgages can be complex. If you’re ready to start your VA loan, check your eligibility, or have specific questions on the VA loan, talk with a Veterans United Home Loans specialist today.
USDA Loan
USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. USDA home loans are putting people in homes who never thought they could do anything but rent.
Pros:
- Rates are usually the lowest available
- $0 down payment available
- Seller can pay closing costs
Cons:
- Geographic restrictions
- Private mortgage insurance included
- Income limits
Requirements to qualify:
- Home must be in a qualified “rural” area (typically defined by the USDA as having a population of less than 20,000)
- Must not make more than 15% above local median salary
- Must live in the home as your primary residence
- Steady job and income, proven by tax returns
- FICO credit score of at least 640 (this number can vary by lender)
- Debt-to-income ratio of 41% or less in most cases
With this guide, you should have the knowledge to make an informed decision about the right loan for your goals. If you have further questions on the subject, you can always discuss it with a trusted real estate professional.
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