What type of loan is right for you? 5 options to consider.
When you get serious about becoming a homeowner, one of the first decisions you’ll have to make is choosing your loan type. Some mortgages are backed, or insured, by government agencies like the FHA, while others are tailored to particular kinds of buyers, like people in the military, or people opting for a fixer-upper in the area where they want to live.
So how do you know which is the right choice for you? Here’s a breakdown of the major types of mortgages.
A conventional mortgage, also known as a traditional mortgage, is a loan that isn’t backed by a government agency like the FHA, USDA or VA, so you won’t have to meet any special criteria or pay an upfront mortgage insurance fee.
Consistently the most popular option out there, the terms never change so you’ll pay the same monthly payment throughout the life of the loan. In 2018, 75% of mortgages were conventional.
But that doesn’t mean they’re easy to get—they often have stricter requirements than other loan types. To qualify, most lenders will want to see a credit score of 620 or higher and a debt-to-income ratio of 43% or less. In return, you may have access to some of the lowest interest rates.
FHA home loans
FHA home loans are backed by the Federal Housing Administration and administered by lenders that have been specially approved by the FHA.
Generally geared toward first-time buyers, they’re typically easier to qualify for than conventional mortgages. Since lenders have the reassurance of a government organization backing the loans, they’re taking on less risk and can be less strict with requirements. Lenders usually look for a credit score of 580 or higher and a DTI ratio of 50% or less, with low down payment options.
VA home loans
VA home loans are available to active or retired members of the U.S. military and certain qualifying relatives. Backed by the Department of Veterans Affairs, you must be approved and receive a certificate of eligibility from the VA in order to use one.
VA home loans share some of the same benefits as FHA home loans, such as more lenient credit requirements and looser rules surrounding DTI.
But one of the things that makes VA home loans particularly unique is the fact that no down payment is required—about 90% of VA home loans customers put down no money at all when they take out their loans.
USDA home loans
Backed by the United States Department of Agriculture, your prospective home must be located in one of the USDA’s qualifying rural areas, and the home must be your primary residence.
This program, like the FHA and VA home loan programs, aims to make homeownership more affordable for more Americans. USDA home loans have income limits—generally your household income can be no higher than 115% of the median income for the area.
A great option for a buyer who doesn’t have the budget for a turnkey property, a renovation loan allows you to roll the money you need for home improvements into the mortgage balance, so you pay simultaneously with your monthly payment.
Fannie Mae HomeStyle renovation mortgages are conventional mortgages that can be used for both home purchases and refinances of an existing mortgage, while FHA 203(k) renovation loans must fall within the FHA mortgage limit for the area.
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