Have you been thinking of getting a mortgage and wondering which home loan is the best for you? Well, in this article we will look at the 5 best types of home loans for you to choose from that fit your unique situation.
As a potential home buyer, it’s equally important to inquire about the types of mortgages available in the neighborhoods you want to live in. Getting a home loan can sometimes be complicated. However, deciding which kind of home loan that best suits your needs early on will help direct you towards the type of home you can afford.
There being a number of home loans to choose from when buying a home, it’s important for you to completely understand the pros and cons of each type before you make your decision. Depending on the kind of home loan you pick, you will have different requirements that will impact the rate, your loan terms and your lender. Choosing the right mortgage for your needs can decrease your down payment and lower the overall interest payment for the life of the loan.
Types of Mortgage:
What are the Requirements to Get a Mortgage?
- Your estimated down payment: The amount of down payment will surely determine the mortgage rate your lender is willing to give.
- Monthly mortgage payment: The lenders will always look at your income and assets to figure out the total loan amount you qualify for.
- Credit score: Your credit score will highly contribute in determining your home loan’s interest rate.
1. Conventional Mortgages
Conventional home loans are the most common kind of home loans. With that being said, conventional loans have very stricter regulations on your debt-to-income (DTI) ratio and your credit score.
It is possible for you to purchase a home with as low as 3% down with a conventional home loan. However, you will need a minimum credit score of 620 (at least) to qualify for a conventional loan. You could also skip the issue of private mortgage insurance (PMI) if you have a down payment of at least 20%.
In as much as you need to pay for PMI if your down payment is less than 20%, the mortgage insurance rates are normally lower for conventional loans than the other types of home loans – like the FHA loans.
Conventional home loans are a good option for those borrowers who are looking to take advantage of low interest rates with a bigger down payment. If for instance your current situation doesn’t allow you to provide at least 3% down yet you are eligible, you might as well consider a USDA or a VA home loan.
Pros of a conventional home loan:
- The total borrowing cost after all fees and interest tends to be much lower than other types of home loans.
- You can qualify for your home loan with as little as 3% down.
Cons of a conventional home loan:
- In situations you are not able to put down 20% as your down payment, you will have to pay PMI.
- It comes with very stricter qualifications that need you to have a minimum credit score of at least 620 and low debt-to-income (DTI).
Who can benefit from a conventional home loan?
- Any borrower with a stable income, is able to provide a 3% down payment and has a strong credit score can benefit from this kind of mortgage.
Government-backed home loans
Government-backed home loans are home loans that are insured by government agencies. When we talk about government-backed loans, we are referring to these three types of loans: FHA, USDA and VA loans. These types of home loans are less risky for lenders since the insuring body is government agencies and they foot the bill if by any chance you default on your mortgage. It is possible to qualify for a government-backed home loan if you fail to qualify for a conventional loan.
Every government-backed home loan has particular criteria you should meet in order to be eligible along with exceptional benefits, however, you might also be able to save on down payment or interest requirements, depending on your eligibility.
2. FHA home loans
FHA home loans are insured by the Federal Housing Administration (FHA). An FHA home loan allows you to purchase a home with a credit score of as low as 580 and a 3.5% down payment. You may also be able to purchase a home with a credit score of 500 if you are in a position to put 10% down.
3. USDA home loans
USDA home loans are insured by the United States Department of Agriculture (USDA). USDA home loans have lesser mortgage insurance requirements than those of FHA home loans – they can let you purchase a home with no down payment. However, you should meet the income requirements and purchase the home in a suburban or rural area for you to qualify for a USDA loan.
4. VA home loans
VA home loans are insured by the Department of Veterans Affairs. A VA home loan can let you purchase a home with no down payment and lower interest rates than most of the other kinds of home loans. However, you are needed to have met service requirements in the Armed Forces or National Guard for you to be eligible for the VA home loan.
Pros of government-backed home loans:
- You can save a lot on interest and down payments – this means your closing cost will be reduced as well.
- The requirements to qualify are lesser than those of a conventional loan.
Cons of government-backed home loans:
- You must meet particular criteria to be eligible.
- Many kinds of government-backed home loans have insurance premiums (also known as funding fees) that are needed upfront – this can lead to higher borrowing costs.
Who can benefit from a government-backed home loan?
- Any person who is not eligible for conventional loans or those with low cash savings.
5. Jumbo home loans
Jumbo home loans are those loans that are worth more than conforming loan standards in your particular area. You will obviously need a jumbo home loan if you want to purchase a high-value property.
Jumbo home loan interest rates are normally the same as those of conforming interest rates. However, they are much more difficult to be eligible for than the other kinds of home loans. Additionally, you will need to have a lower DTI and a higher credit score for you to be eligible for a jumbo loan.
Pros of jumbo home loans:
- They have similar interest rates as conforming loans.
- You can borrow much more to purchase a more expensive home.
Cons of jumbo home loans:
- It’s very difficult to be eligible for, usually needs a credit score of at least 700, a low DTI ratio and significant assets.
- You will need a greater down payment – usually between 10% – 20%.
Who can benefit from a jumbo home loan?
- You can benefit from a jumbo home loan if you need a loan that is higher than $647,200 to purchase a high-end home. However, you need to have a good credit score and low DTI.
The bottom line
The best type of home loan is dependent on your personal preferences and current situation. Before you choose your mortgage loan, consider calculating your projected purchase and refinancing costs to find out exactly how much you will need to borrow from your preferred mortgage lender.
Potential home buyers have much more to consider when choosing from the different kinds of home loans available. Your income, credit score, debt and property location are all factors that influence the home buying process and the type of home loan you can get. At Pillar Mortgage, we have all the above mortgage loans. We are also ready to work with you in your unique situation. Start your mortgage application with us now!
