Buying a house is exciting but also expensive. You’ll need financing unless you have the cash to pay it in full. Most borrowers have a few loan options when buying a house, so understanding the types of mortgages available can help you make the right decision.
Here are the top mortgage loans available today.
Conventional Mortgage Loans
Conventional loans are standard mortgage loans. They are the mortgage loans most people consider when borrowing money to buy a house, but they are best for borrowers with good credit and low debt-to-income ratios.
To get a conventional loan, you’ll need the following; however, the exact requirements vary by lender:
- Minimum 640-660 credit score
- Maximum 36% – 43% debt-to-income ratio
- Stable income and employment for the last two years
- At least 3% down if you’re a first-time homebuyer
- At least 5% down if you’ve owned a home before
If you put down less than 20% on a conventional loan, you’ll pay Private Mortgage Insurance until you pay the loan balance down to less than 80% of the home’s value. At that time, you can request cancellation, or lenders must cancel it automatically when you owe less than 78% of the home’s value.
Pros:
- Competitive interest rates
- Low down payment requirements
- Mortgage insurance is cancelable
Cons:
- Harder to qualify for
- Mortgage insurance increases your loan payment
FHA Loans
FHA loans are government-backed loans and are a good conventional loan alternative. FHA loans are usually a good option if you don’t have the credit score or debt-to-income ratio to qualify for a conventional loan.
FHA loans have more flexible guidelines, including the following:
- Minimum 580 credit score with a 3.5% down payment
- Minimum 500 credit score with a 10% down payment
- Maximum debt-to-income ratio of 43% – 50%
- Stable income and employment for the last two years
- Proof you’ll occupy the home as your primary residence
All borrowers pay mortgage insurance with FHA loans for the life of the loan. You don’t get the option to cancel it. Borrowers pay 1.75% of the loan amount at the closing and 0.85% of the outstanding balance annually, divided into 12 equal monthly payments.
Pros:
- Lower credit score requirements than conventional loans
- Low down payment requirements
- Higher debt-to-income ratio allowances
Cons:
- Mortgage insurance lasts for the life of the loan
- FHA loans have lower loan limits in certain areas
VA Loans
VA loans are another government-backed loan option, but they are only for veterans or surviving spouses. To be eligible, you must have served 24 continuous months in the military or at least the full-time you were called to serve.
VA loans don’t have down payment requirements, and they have more flexible guidelines for veterans to make it easier to buy a home. However, this loan is only for veterans or spouses married to veterans who lost their lives in the service; if you or your spouse weren’t in the service, you aren’t eligible.
VA loans have the following requirements:
- Minimum 620 credit score
- Maximum 43% – 50% debt-to-income ratio
- Stable income and employment for the last two years
- Prove you’ll use the home as your primary residence
- Have your Certificate of Eligibility
Pros:
- No down payment
- VA loans don’t require mortgage insurance
- Flexible underwriting guidelines
Cons:
- Only veterans or surviving spouses are eligible
- Some sellers don’t accept them
USDA Loans
USDA loans are another government-backed product meant for a specific audience. This product is for low to moderate-income families living in rural areas. The good news is that the USDA has a more liberal definition of rural areas, so you aren’t stuck in the middle of nowhere. Plus, USDA loans don’t require a down payment.
To qualify for USDA loans, you must meet the following:
- Meet the income eligibility requirements
- Minimum credit score of 640
- Maximum debt-to-income ratio of 41%
- Stable income and employment for the last two years
- Proof you’ll occupy the home as your primary residence
- Proof you don’t qualify for any other types of mortgages
Pros:
- No down payment required
- Flexible underwriting guidelines
- Offers competitive interest rates
Cons:
- Only families within certain income limits qualify
- You must buy a home in a rural area
Jumbo Loans
Jumbo loans are loans for higher loan amounts than the county’s limits. For example, most areas have a loan limit of $726,200, but certain areas are high-cost and allow loan limits of $1,089,300.
Also Read: What Are Jumbo Loans and How Do They Work?
Jumbo loans are not government-backed and vary by lender because they don’t have any guarantees. To qualify, lenders often require higher credit scores, lower debt-to-income ratios, and larger down payments.
Like all loans, the requirements vary by lender, but on average, you can expect the following:
- Minimum 700+ credit score
- Maximum 36% – 43% debt-to-income ratio
- Down payment of at least 20%, sometimes higher
- Proof of adequate income
Pros:
- Allows you to buy more expensive homes
- Requirements vary by lender, some may be more lenient than others
- Offers competitive interest rates
Cons:
- Tougher to qualify for
- Usually requires high down payment
Fixed and Adjustable-Rate Mortgages
Most of the types of mortgages mentioned above are available as a fixed or adjustable-rate mortgages.
Fixed-rate mortgages have rates that don’t change for the life of the loan, and adjustable-rate mortgages have a fixed rate for a short period and then adjust annually.
If you’re buying your ‘forever home,’ a fixed-rate mortgage may be a better option, but if your purchase is temporary or your income situation will change, an adjustable-rate mortgage may be the better option.
Final Thoughts
The best loan for buying a house is the loan you qualify for and can afford. Each borrower will have different mortgage loans that suit their needs.
Explore your options, and if you need help or don’t know where to start, Priva Mortgage is here to help. Contact us today.
