Comparing Home Purchase Loan Types

Mortgage loans come in many shapes and sizes, and it’s important to find one that works best for your income, credit history, and the home prices in your area.

Below is a breakdown of the most common types of home loans, from conventional to FHA to adjustable rate mortgages. Use this as a jumping off point, and talk to your loan advisor to choose the loan type that best suits your home-buying journey.

Conventional loan
This is the most common type of home loan. Conventional loans have certain requirements to qualify. For starters, you’ll need a good credit score of at least 620 and a debt-to-income ratio of less than 36%.

But conventional loans also come with benefits. For example, your down payment could be as low as 3% (with private mortgage insurance). If your finances and credit score are solid, a conventional loan is a great choice.

Government-backed loan
With a government-backed loan, your mortgage is insured by a federal agency. That means if for some reason you can’t pay back your loan, the government will step in and handle the default. There are several types of government-backed loans.

FHA loan
The Federal Housing Administration insures these loans, and you could qualify with a credit score of 580 with a 3.5% down payment. You could even qualify with a credit score as low as 500 with a 10% down payment. These loans require FHA mortgage insurance for 11 years or until the loan is paid off.

FHA 203k loan
If you’re game for buying a fixer upper, this type of loan will fund both your mortgage and renovations. Homes in disrepair often won’t qualify for mortgages, but an FHA 203k loan solves that problem.

You can borrow up to $35,000 for renovations, and eligibility is relatively lenient. However, mortgage insurance is required, and there are restrictions on the types of renovations you can make—i.e. in-ground pools and luxury fixtures likely won’t make the cut.

VA loan
If you have served in the military, the Department of Veterans Affairs will back your loan without a down payment or mortgage insurance.

USDA loan
These loans are offered to home buyers in designated rural areas. The U.S. Department of Agriculture backs this type of loan, and also provides direct loans with no down payment required.

Adjustable rate mortgage
An adjustable rate, also called a variable rate, means that your interest rate is fixed for a certain amount of time, and after that it could change. It’s a risky option because if interest rates increase after your designated amount of time, your monthly mortgage payment will increase.

Most home buyers choose a 30-year fixed mortgage, meaning the monthly payment remains the same for the life of your loan. But an adjustable rate mortgage can be a good option, especially if you plan to sell the home in less than 10 years. You could lock in a low rate for the first several years of the loan and save thousands on your mortgage.

After reading through these loan types, hopefully one or two stood out as a fit. Bring this information to your loan advisor to take the next step in securing a loan. Not every lender works with every type of loan, so you may need to shop around. Whether you’re buying in a rural, suburban, or urban area, and whether your credit score is 500 or 750, there’s a loan type that’s right for you.

Sources: The Mortgage Report, NerdWalle