Which type of home loan is easiest to qualify for? Which is best for your financial circumstances? Lenders consider many factors in the loan pre-approval process. Ultimately it comes down to your credit worthiness, income, finances, and the types of properties you’re considering. 

#1 Conventional Loans

Conventional mortgages are home loans from lenders that aren’t insured or guaranteed by the U.S. government. The lender takes all the risk. That’s why credit scores and income requirements are often higher compared to government-backed loans.

Conventional loans are offered by banks, mortgage companies, credit unions, and online lenders. Typically this down payment is 10-20%, but borrowers can put down as little as 3-5%; the loan will have PMI unless 20% is put down. Use a loan calculator to see how the down payment changes monthly payments.

There are 3 main types of conventional loans:

  1. Conforming:
    • Most mortgages are conforming loans. This means they meet the guidelines set by Fannie Mae and Freddie Mac. With that requirement satisfied, conforming loans can be underwritten, funded, and sold to investors on the open market. The standard conforming loan amount on a single-family home for 2024 is $766,550.
  2. Jumbo Loans:
    • A jumbo loan is a type of non-conforming loan that’s used when a property’s price is too high to fit into a conventional loan. This means that the loan exceeds $766,550 for borrowers in most places in the United States. Due to their size and inability to be guaranteed by a government agency, lenders consider these loans riskier. These loans have higher debt-to-income and other requirements as they are larger loans.

#2 Government Backed Loans

Home financing options that were created through government programs are designed to make homeownership more affordable and realistic for more Americans. By guaranteeing loans, the government encourages lenders to approve “riskier” lenders.

  1. FHA Loans (Federal Housing Administration)
    • These loans are ideal for borrowers with lower credit scores or limited savings. For borrowers who don’t have large down payments, FHA loans make it possible to be approved for a mortgage with just 3.5% (580 credit score) to 10% (500 credit score) down payment. Mortgage insurance is required on FHA loans regardless of the size of the down payment. Additionally, a home must undergo a special FHA home inspection/appraisal and meet some basic FHA standards in order for the mortgage to be approved. Due to the extra stipulations, getting a seller to work with an FHA borrower sometimes takes extra negotiations.
  2. USDA Loans (United States Department of Department of Agriculture)
    • USDA loans are zero-down loans for borrowers purchasing homes in designated rural areas. Like FHA loans, they offer lower interest rates compared to conventional mortgages because government backing reduces risks for lenders. One perk that sets USDA loans aside from FHA loans is that mortgage insurance isn’t necessary.
  3. VA Loans (Department of Veterans Affairs)
    • VA mortgages to help veterans, service members, and eligible surviving spouses purchase or build homes. In addition to being zero-down loans, VA loans also typically have lower interest rates and favorable terms. Like USDA loans, VA loans don’t require mortgage insurance even if you purchase a home without a down payment.

#3 Build & Renovation Loans

If you’re building new construction or renovating an existing property, there are special types of mortgage loans to help you get the flexible financing you need.

  1. Renovation Loans
    • Renovation loans give homeowners funding to make changes that will either improve or restore a home. Generally, a renovation loan’s amount is based on the estimated value of a home after renovations are complete. Most borrowers lump a renovation loan with a mortgage to get the benefit of only making a single monthly payment. The loan options available to you will depend on your credit score, the location of the property, and the scope of the work that needs to be done.
    • Types of mortgage loans for renovations include:
      • Fannie Mae options (Homestyle Renovation)
      • Freddie Mac options (CHOICERennovation loan, CHOICERennovation express)
      • FHA options (Limited & Standard 203k loans)
      • VA options
      • USDA options
  2. New Construction Loans
    • Construction loans are short-term loans that borrowers use to fund building their new homes. Most construction loans are designed to be converted to mortgages after construction is complete. However, some borrowers prefer standalone construction loans that they intend to pay off early. Construction loans can be used to finance land, labor, building materials, and permits.
    • These loans come with stricter borrowing requirements and higher interest rates. Home finance options for new constructions include:
      • VA construction
      • FHA construction
      • Conventional construction

#4 Alternative Payment Loans

Here’s a look at some unconventional options for financing a home that can be a creative alternative for select borrowers.

  1. Balloon
    • Balloon mortgages are non-qualifying loans (non-QM loans) that give lenders more freedom about terms. However, there’s less borrower protection. Borrowers who take out balloon mortgages make either no payments or small payments for a set period of time before a large balloon payment is due at the end of the loan term. A typical balloon mortgage might last five to seven years. While borrowers enjoy an easier payment period at first, this can be a risky choice because some borrowers may struggle with the large payment needed to satisfy the loan at the end of its term.
  2. Interest-only
    • An interest-only mortgage has scheduled payments that require the borrower to only pay the interest owed for a set period. Monthly mortgage payments will be much higher compared to interest-only payments once they kick in. A risk that comes with an interest-only loan is that there’s no guarantee that you’ll be able to refinance.Once the interest-only period is over, the borrower may choose to:
      • Pay off the full balance
      • Refinance the mortgage
      • Begin to pay off the balance using monthly payment
    • Piggyback
      • A piggyback mortgage is a second mortgage in the form of a home equity loan or home equity line of credit (HELOC). Piggyback mortgages originate at the same time as a home’s main mortgage. The function is that a piggyback loan allows a borrower with low savings for a down payment to qualify for a smaller primary mortgage without paying PMI. Piggyback mortgages are uncommon. They also typically come with higher interest rates that are adjustable.

Loan Terms

The two main types of mortgage loan terms are 30-year and 15-year loans. Most borrowers prefer 30-year loans for their smaller monthly payments. However, 15-year loans generally offer lower interest rates. Someone with a big down payment or funds from a previous home sale that they can put toward the new home may prefer a 15-year loan if they’re trying to pay a home off before retirement.

Loan Interest Rates

Finally, we get to fixed-rate mortgages vs. adjustable-rate mortgages (ARMs). With a fixed-rate loan, a borrower will pay the same interest rate for the life of the loan unless they decide to refinance at some point. This allows them to have predictable monthly mortgage payments that never change.

An ARM has a variable interest rate that adjusts over time with the market. Most ARMs come with a low introductory rate that can be desirable for someone who only plans to stay in a home for a short period of time. It’s important to carefully read over closing disclosure documents to make sure you understand when rate adjustments will happen.

Previous
Next

You may also like

More in:Real Estate