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Buying a Home or Refinancing? Here's How to Find the Right Home Loan
Navigating the world of home-buying could be an Olympic sport. There are so many different regulations, guidelines and fees to keep track of -- and by the time you master one part, there are new rules to learn. And, with mortgage rates predicted to continue rising, particularly as the Fed looks to increase rates as early as March, locking in a rate sooner rather than later may save you tens of thousands in interest.
When searching for the right home loan, you're bound to come across many options. But not every mortgage is right for every person -- you'll want to learn more about the different types of home loans to decide which one is right for you. This guide will help break down several of the most common home loan types, while explaining what's required for approval and who each type is best for.
Read more: Mortgages, Credit Scores and Down Payments: 5 Things to Know Before Buying a Home
1. Conventional loan
What it is: A conventional loan is a loan that isn't backed by a government agency. These are the most common type of loan. Conventional loan terms come in 10-, 15-, 20- and 30-year terms, with 30-year terms being the most popular option.
What you need: You can get a conventional loan with as little as 3% down payment and a 620 credit score. But the lower your credit score, the more money you might need for a down payment.
Who it's good for: The majority of home loans -- around 75% -- are conventional loans, so it's good for most people. You can use it for your first home, second home and even investment properties.
Who should skip it: Borrowers who don't have the minimum credit score requirements or need payment assistance.
2. FHA loan
What it is: An FHA loan is backed by the Federal Housing Administration, which provides mortgage insurance to lenders who provide FHA loans. It's the largest mortgage insurer in the world. Loans are administered by FHA-approved lenders. This can be local banks, credit unions and online lenders. Loans come in 15- and 30-year terms.
What you need: To secure a 3.5% down payment rate, your credit score will need to be 580 or above. If it's below 580, you can still qualify, but you'll need at least a 10% down payment. For down payments of less than 20%, your loan will require private mortgage insurance. PMI protects the lender just in case you default on your loan. PMI will get removed from your mortgage payments once you have at least 20% equity in your home.
Who it's good for: Borrowers who don't have strong enough credit to qualify for a conventional loan. FHA loans also offer down payment loans and grants through federal, state and local programs whereas conventional loans don't.
Who should skip it: If you have good or excellent credit that would qualify you for a conventional loan.
Check out our full guide to FHA loans.
3. VA loan
What it is: VA loans are offered through the US Department of Veterans Affairs. Military veterans, those in active duty or in the reserves qualify for VA loans.
What you need: There's no down payment or minimum credit score requirement to get a VA loan.
Who it's good for: Those who serve or have served in the military.
Who should skip it: Borrowers who aren't in the military, obviously. VA loans are only good on primary residences so if you need funding for a second home or investment property, you'll need to look at other options.
Check out our full guide to VA loans.
4. USDA loans
What it is: USDA loans are funded by the US Department of Agriculture. They're available in specific regions across the country. They're made for borrowers in mostly rural areas who might not otherwise qualify for a traditional loan. Loans are backed by USDA-approved lenders (similar to FHA-backed loans). You can check to see if you'd qualify by checking the eligibility site.
What you need: There's no down payment required for a USDA loan. Most lenders require at least a fair credit score.
Who it's good for: Families in rural areas as long as you meet income and location limits.
Who should skip it: Those who don't meet the location and income requirements. If you qualify for one and not the other, you also might want to look into alternative loan options.
Check out our full guide to USDA loans.
Other loan types to know about
As well as being based on a government (or nongovernment) program, mortgages can be categorized by interest rates and how much the home price is. Those are:
- Fixed-rate loans: These are the most common type of loan within a conventional mortgage. Fixed-rate loans means you'll pay the same interest rate every month for the life of the loan. The only time your interest rate will change is if you refinance your mortgage.
- Adjustable-rate mortgages: ARMs have a fixed interest rate for a set amount of time and then the interest rate fluctuates periodically. They usually start out lower than standard fixed-rate mortgages but can change over time based on a benchmark. A 5/1 ARM means the first five years have a fixed rate and then a variable interest rate that changes every year after that.
- Jumbo loans: This is a mortgage that finances a property that's too expensive for a traditional loan. The qualifications for jumbo loans tend to be more strict. For most lenders, you'll need a credit score of at least 700 and usually a 20% down payment. Jumbo loans start where conforming loans end, which is different depending on where you are. Jumbo loans can have fixed or adjustable rates.
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