Loan Comparisons

4 Types of Home Loans & How to Choose the Right One for You

Jan 8, 2019, 2:15 PM | Robin Johnson
A family stands in front of a home trying to choose which type of home loan to get

The prospect of buying your very own home is thrilling, but when you look at the numbers in your bank account and compare them to the cost of the home, things can begin to feel daunting. Plus, with so many types of home loans, it can be hard to find one that best fits your needs while still getting into the home you want.

To help with this, we've included a brief overview of four different types of home loans: conventional, FHA, USDA, and jumbo. Keep reading to learn about your options and take steps toward finding the type of home loan that is best for you.

Conventional Loans

Unlike some of the other loan types we will be discussing, a conventional home loan is not backed, guaranteed, or insured by any government agency. Because of this, you are required to have a down payment.

Conventional loans are particularly beneficial for those with good credit scores, as well as those who have reserve funds in their bank account. Some other important aspects of conventional loans include:

  • You will usually need a credit score of 640 or higher to qualify
  • Down payments can be as low as 3%, but below 20% will require private mortgage insurance (PMI)
  • The average home loan limit is around $453,100 for most areas in 2018
  • Requirements are often more strict than for other loan types
  • Interest rates vary for conventional loans, but generally you'll get a better rate the higher your credit score is

One of the great advantages of a conventional home loan is that it is often cheaper in the long run than some other types of loans. This is because, if your down payment is high enough, you can avoid paying PMI or other types of mortgage insurance, which can lower your monthly payments.

FHA Loans

The Federal Housing Administration (FHA) is one of the largest insurers of mortgages. It offers the FHA home loan to not only help those with low income and low credit scores afford housing, but also to help stimulate the economy by developing more homes and communities.

The FHA is a government agency that was created in 1934 to encourage development and create jobs. While the economy is not in the same dire circumstances as when the FHA was created, FHA loans still offer affordable housing and support for local economies.

Other important facts and requirements for FHA loans include:

  • Credit scores as low as 500–580 can still qualify
  • A minimum 3.5% down payment is required, which is lower than a lot of other loan types
  • Upfront and monthly mortgage insurance premium (MIP) payments are required
  • Competitive interest rates are available because the loan is backed by the FHA with self-generated funds
  • The home loan limit for most areas is around $314,827 (though more expensive counties do have higher limits up to $726,525)

For all of these reasons, FHA loans can be a great option, especially for first-time homebuyers. If you think it sounds like it might be the right home loan type for you, you can visit our complete guide to FHA loans for more detailed information.

USDA Loans

USDA home loans are for people looking to buy a home in a rural or suburban area. They are backed by the US Department of Agriculture (USDA) and are not as well-known as some of the other government-backed loans.

Technically, there are couple different types of USDA home loans. However, the most common type is the single family housing guarantee loan program. This loan is backed by the USDA but is offered through private lenders.

All USDA loans were created to encourage development in the more rural parts of the US. In addition, they are a zero down payment loan, which sets them apart from most other loan types. Some other important features include:

  • Low interest rates, thanks to the guarantee provided by the USDA
  • Monthly mortgage insurance payments of only 0.35% of the loan amount, which is lower than the insurance for both conventional and FHA loans
  • A 1% upfront funding free for 30-year loans
  • Loan approval, even if you don't have a credit score, or your score is low, as long as you have an acceptable credit history
  • Income eligibility requirements that help low- and moderate-income borrowers

Because of the lower cost, USDA loans are a great option for new homeowners who want to live in a more rural area, especially if they don't have a lot of money saved up. It is a great loan for a starter home, borrowers with low incomes, and borrowers having trouble being approved for another loan.

Jumbo Loans

Jumbo home loans are mortgages for people looking to purchase a large or expensive home. They start at amounts above an area's conforming loan limits, which are $484,350 for most counties and $726,525 for high-cost counties.

Because this is such a large loan, the loan approval requirements are more strict than for other loans. Some of these include:

  • A minimum down payment usually between 15%–30%
  • A higher credit score, usually above 700
  • Six to twelve months of savings in the bank
  • A debt-to-income (DTI) ratio under 43% (though a higher DTI may be allowed with larger down payments)
  • Two appraisals, instead of just one, may be needed to confirm the actual home value

With jumbo loans, it's important to know that rates may be a bit higher than they are for smaller loans. However, this gap between rates isn't as wide as it used to be, making jumbo loans a great choice if you want to purchase a large, luxury home and you have a financial situation that can afford it.

Which Loan Is Right for Me?

Now that you know more about these four types of home loans, how do you know which one is right for you?

Ultimately, deciding which type of loan is right for you comes down to three main things:

  1. Your long-term plans
  2. Your credit score
  3. How much you've saved for a down payment

Depending on your situation in regards to these three factors, you may realize that you need a mortgage with lower interest rates and easier qualifications, like a USDA or FHA loan. This is especially true if you need of a home right now and don't have time to build up your credit or save for a down payment.

Or maybe a conventional or jumbo home loan sounds like it will best fit your long term plans. Even if your finances aren't ready right now, you can take some time to build up your credit before you apply.

It's also true that your first home doesn't have to be your dream home. You might not be able to afford your dream home right now, but maybe one of the smaller loans will help you get started on the path you want to take.

Let the Experts Help You

Finding the right loan type can be a challenge, but you don't have to do it alone. At Elevate Mortgage, we have experience with all four of the loan types covered in this post. If you'd like help exploring which loan is right for you, give us a call at 888-935-3828 or reach out to us online.

Robin Johnson