Home Buyer's Guide: Which Loan Is Right For Your Home?

Buying a home is exciting, but figuring out the financing side may be a bit overwhelming. Choosing the right mortgage loan in purchasing your dream home is not difficult at all if you know each type. Don’t worry, we’ve got you covered! Here are the most common mortgage options that you could choose from:

Conventional

This is the most common mortgage option and usually has the best interest rates. It is not offered or secured by a government entity and is available through or guaranteed by a private lender.

Conventional loans have a higher bar for approval than other types do. They tend to be good for borrowers with good credit and a low debt-to-income (DTI) ratio who can make a down payment of 20%, as this allows them to avoid paying for private mortgage insurance (PMI).

Conventional loans are much more common than government-backed financing. In the first quarter of 2018, these were used for 74% of all new home sales, making them the most popular home financing option—by a long shot.

FHA (Federal Housing Administration)

An FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration (FHA) according to Investopedia. Designed for low-to-moderate-income borrowers, FHA require a lower minimum down payments and credit scores than many conventional ones.

With this, you can borrow up to 96.5% of the value of a home (as of 2020). You’ll need a credit score of at least 580 to qualify. If your credit score falls between 500 and 579, you can still get an FHA loan provided you can make a 10% down payment. With FHA loans, your down payment can come from savings, a financial gift from a family member, or a grant for down-payment assistance.

All these factors make FHA loans popular with first-time homebuyers.

VA (Veterans Affairs)

According to Forbes, military service members and veterans who want to buy a home have access to a unique benefit: a VA loan. It’s the only widely available mortgage that requires no down payment and has no minimum credit score. Hundreds of thousands of qualified borrowers use these loans every year to purchase a place they can call their own. 

VA borrowers do not have to pay PMI, but they do have to pay a funding fee. However, the VA funding fee tends to be much less expensive than PMI because you only pay it once, not year after year as with a conventional one.

This can be an excellent financial tool to help you buy a home if you’ve served your country with honor.

USDA (United States Department of Agriculture)

USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. These are available to home buyers with low-to-average income for their area, offer 100% financing with reduced mortgage insurance premiums and feature below-market mortgage rates.

This type of mortgage loan is a zero down payment mortgage for eligible rural and suburban homebuyers. It is issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.

USDA Loans are best for real estate investors.

Adjustable-Rate Mortgage

An adjustable-rate mortgage, or ARM, is a mortgage with an interest rate that can be increased or decreased from time to time, depending on various factors. An ARM is helpful for someone taking out a mortgage during a period of low-interest rates, especially if the ARM has a relatively longer fixed-rate period.

In addition, this type of mortgage loan allows the lender to change the interest rate at certain points during the term of the loan. Adjustable-rate mortgages often start out with a low-interest rate, even sometimes below-market rates. However, the rate can increase or decrease significantly over the life of the loan.

This type of loan is best for any interested buyers.