Choose a home loan based on your financial needs, mortgage rate, lender, and loan terms.
Consider a government-backed home loan if you meet the qualifications.
Weigh the advantages and disadvantages of each loan type before making your decision.
There’s no denying that applying for a mortgage can be stressful—there are so many terms, logistics, and paperwork to sort out. But the best first step is to determine which type of home loan to apply for based on your homeownership goals.
To get started, let’s take a look at some of the most common types of home loans to find the option that fits your financial needs. Then, you can contact a local real estate agent for recommendations for the best loan lender.
1. Conventional Loans
This phrase refers to almost any loan not insured or guaranteed by the U.S. government, and it’s the most common type of mortgage. They can be used to purchase a first home, vacation home, or investment property. To qualify for a conventional mortgage, you’ll need a minimum credit score of 620, plus the ability to put down at least a 3% down payment.
These types of loans can be both conforming and non-conforming, and they’re best suited for borrowers with higher credit scores and lower debt-to-income ratios.
A conforming loan meets the standards of the Federal National Mortgage Association (FNMA). These standards limit loan amounts based on credit, debt, and loan size.
Like the name suggests, these types of loans don’t meet FNMA standards and get their backing from private companies. Common examples of non-conforming loan situations include a home that’s more expensive than the conforming loan limit or borrowers with below-average credit scores.
2. Fixed-Rate Loan
A fixed-rate mortgage is a loan that carries the same principal and interest rate throughout the life of the loan, which is typically 15 or 30 years. That means your monthly mortgage payment remains the same with a fixed-rate mortgage.
While fixed interest rates are generally higher than adjustable-rate mortgages, this loan type provides the security of knowing that your monthly mortgage payment won’t change. However, if you need a little wiggle room when it comes to qualifying for a loan, you may want to opt for an ARM to take advantage of a lower monthly payment.
3. Adjustable-Rate Loan
In contrast to fixed-rate mortgages, adjustable-rate mortgages (ARM) have fluctuating interest rates that vary depending on the market rates. Many ARM loans have fixed-interest periods for the first few years; then it changes based on market conditions. While ARM loans allow homeowners to save on interest payments over time, the volatility of the interest rate means that the monthly mortgage payment could increase based on market interest rate shifts.
This loan type is best suited for home buyers who don’t plan to stay in their home for the full 15 or 30 years or want to pay it off early. Some homeowners prefer to use ARM loans to pay for their starter home, not their forever home.
4. Federal Housing Administration (FHA) Loan
The federal government backs Federal Housing Administration (FHA) loans. This loan type is known for its low qualifying requirements and the benefits they offer for first-time home buyers. Borrowers need a minimum credit score of 580 to qualify and must be able to pay a down payment of at least 3.5%.
An FHA loan may be the right choice for you if your credit score doesn’t meet the requirements for a conventional loan or you’d like to put less money down for a down payment. Keep in mind that some of the housing requirements are more restrictive than conventional loans, meaning that not all properties will qualify for this type of financing.
5. U.S. Department of Agriculture (USDA) Loan
U.S. Department of Agriculture (USDA) loans are reserved for home buyers who meet the income requirements and plan to buy a home in a rural or suburban area. Like FHA loans, USDA loans get their backing from the government. You can determine whether your potential new home is eligible for this loan product using this USDA map). This loan type carries lower mortgage insurance requirements plus it offers 0% down payment for qualified borrowers.
However, not all mortgage companies provide USDA loans, so you’ll need to track down a lender that services these types of mortgages. Also, you’ll need to meet the strict loan qualifications, including solid credit history and a two-year job history.
6. VA Home Loan
If you’ve served in the U.S. armed forces, you may be eligible to apply for a mortgage that is partially backed by the U.S. Department of Veteran Affairs. VA loans are low-interest mortgages only for active and veteran service members or eligible surviving spouses. These loans don’t require a down payment, mortgage insurance, or minimum credit score, but they do charge a funding fee.
7. Construction Loan
If you are planning to build your new home, you may consider applying for a construction (or construction to permanent) loan. This type of short-term financing covers the cost of building a home to help you hire builders and begin construction on an undeveloped property, but it’s separate from a land loan. Keep in mind that this loan type requires a higher down payment and a minimum credit score of 620.