Which Mortgage is Right For You? Check Out These 4 Options

Unless a home buyer is purchasing their home with all cash, they need to choose a home loan. Buyers have many home mortgage options to choose from. Many are specific to certain situations to give buyers extra benefits they wouldn’t get with another loan. So, with all the diverse requirements and offerings, how do you decide what the right mortgage is? Gain an overview of your home loan options and what makes them good choices.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Veteran’s Affairs Loan

A Veteran’s Affairs loan (VA) is a home mortgage product exclusive to active and past members of any branch of the United States Military. Under specific circumstances, these loans are also available to the spouses of those military members. Within VA loans are sub-products:

• VA purchase loans
• Interest Rate Reduction Refinance Loan (IRRRL)
• Native American Direct Loan (NADL)
• Cash-out refinance loan

Federal Housing Administration Loans

Federal Housing Administration (FHA) loans are popular among first-time and low-income home buyers. These government-backed loans allow buyers to have a lower down payment, which can be as little as 3.5%. In exchange for a lower down payment, the buyers must pay Private Mortgage Insurance (PMI). However, having a lower down payment requirement makes homeownership more accessible to more people.

Not everyone can use an FHA loan; buyers need to fit a list of criteria, including things such as having held the same job for two years and having a minimum credit score of 500. The buyer doesn’t need to go through a private lender, such as a bank, but these mortgage originators do offer access to FHA programs.

United States Department of Agriculture Loans

United States Department of Agriculture (USDA) loans are a more specialized variety of government-backed loans than FHA loans. Whereas FHA loans can be used on most homes as long as they’re safe and structurally sound, USDA loans restrict the eligible home type based on geographical factors. To be eligible for a USDA loan, the home must be located in an approved rural or suburban part of the country. The program’s intent is to incentivize people to move to these areas, which helps stimulate the economy. Because of this, USDA loans can’t be used on any homes in designated suburban or urban zones based on population factors. For that, you’ll need a different home loan option.

Conventional Loans

Many people don’t use or qualify for government-backed loans like the ones above. Instead, they use conventional loans, a term that refers to all loans made through a private lender. Conventional loans can be either conforming or nonconforming. The difference between the two is that conforming loans match a list of guidelines set by Fannie Mae and Freddie Mac. These guidelines restrict the maximum loan amount, the borrower’s debt-to-income ratio, etc. This allows the mortgage originator to obtain government-backed insurance on the loan or to package them for sale on the secondary market.

Even within conventional loans, the home mortgage options vary, particularly in length and rate. Learn about fixed-rate and adjustable-rate mortgages.

On the other hand, non-conforming loans do not abide by these guidelines. The most common type of non-conforming loan is a jumbo loan. The FHA, VA, and USDA loans also would be considered non-conforming, as would any private alternative financing like a hard money loan.

Buyers should research all the home loan options available to them to choose the one that suits their needs best and ensure they get all the benefits they should. Plus, different mortgage originators offer different rates and products. Shopping around can save you thousands on your home purchase in the long run.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Updated December 2023