When looking for a new home, there are several mortgage loans available to you. Each of these loans comes with different requirements, uses, and qualifications, and you may be wondering which loan will work best for your financial situation and the home you’re looking to buy. Typically, there are four main loan types that you’ll be looking at for a mortgage. These loans are:
What Is a Conventional Loan?
A conventional loan is the most common loan you will come across. Conventional loans are mortgage loans that are not backed by the government but rather are insured and guaranteed by the Federal National Mortgage Association (also known as FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as FHLMC or Freddie Mac). There is no one standard or set of requirements for conventional loans, but they all must meet or “conform” to Fannie Mae’s and Freddie Mac’s qualifications. They are available to anyone who can meet a lender’s conventional loan requirements.
Pros and Cons of Conventional Loans
Pros:
- More widely available at a variety of lenders
- Allowed for multiple different properties (primary, secondary, investment)
- Usually lower interest rates
- A wider array of loan terms or requirements, allowing you to “shop around”
Cons:
- Typically required higher credit scores
- Requires private mortgage insurance (PMI) with a down payment of less than 20%
- Non-assumable—terms and mortgage cannot be passed from seller to buyer
What Is an FHA Loan?
Originally started to ease the effects of the Great Depression on the housing market, FHA mortgages are government-insured loans with easier entry points than other types of loans. The Federal Housing Administration backs FHA loans to allow for the purchase of primary residences. FHA mortgages provide insurance that protects the lender from losses if the borrower can no longer make payments and defaults. Because of this government-backed guarantee, it is often easier to obtain an FHA loan compared to a conventional loan. While FHA loans are a popular choice for first-time home buyers, it is not required that you be a first-time buyer in order to qualify.
Pros and Cons of FHA Loans
Pros:
- Lower credit score requirements
- 3.5% down payment
- Allows for a higher debt-to-income ratio
Cons:
- Requires mortgage insurance that will exist for the life of the loan
- Can only be used for primary residences
- Has tighter appraisal requirements you must be able to meet
What Is a USDA Loan?
One of the lesser-known mortgage loans is a USDA loan. USDA loans are backed and guaranteed by the United States Department of Agriculture which makes buying a home in a rural area much easier, especially for people with lower or moderate incomes. While a USDA loan does require that you buy a home in a rural area, often places in suburban areas will also qualify. If you’re unsure, you can check out the USDA’s eligibility map to see if the area you want to live in qualifies for one of these loans. You can find these loans available at certain lenders; however, the USDA may also grant the loan directly to borrowers if they meet the requirements.
Pros and Cons of USDA Loans
Pros:
- The biggest draw of a USDA loan is that it does not require a down payment
- Only requires a 640 or higher credit score
- No penalty for paying off the loan early
Cons:
- For primary, single-family residences only
- Geographical location restrictions
- Has income limits—you could be disqualified for making too much
- May take longer for approval than a conventional loan
What Is a VA Home Loan?
VA Home Loans are available to active or retired military members who are searching to buy a new home. These loans are provided by private lenders; however, they are backed and guaranteed by the U.S. Department of Veterans Affairs. These loans are a way to ensure that our military is able to buy a home without needing a high amount of cash reserves after returning from active duty. These loans are also available to a surviving spouse of a military member or veteran.
Pros and Cons of VA Home Loans
Pros:
- 0% down payment
- No monthly mortgage insurance is required
- Can offer up to 100% financing
Cons:
- Only is available for a primary residence
- Strict requirements to be met, including active or retired military status
- Requires a funding fee that can be as much as 3.6% of the loan amount. (This can be waived if you have a 10% disability rating or more)
- Comes with tighter appraisal requirements
Trending Topics in Homebuying
Hometown Heros Program
The Hometown Heros Program in Florida is a home-buying government incentive that originally helped first responders purchase their first homes. Recently, an additional $1 million of funding has been added to the program, and has expanded to include other first-time homebuyers beyond first responders. If you’re looking for your first home, this is a great program to take advantage of.
The requirements to benefit from this program are:
- You are a first-time homebuyer.
- You have a credit score of 640 or above.
- You make less than 150% of your area’s median income (AMI).
- You are employed full-time by a Florida-based company or employer.
- You are purchasing a home in your area of employment.
The benefits of this program include:
- Lower interest rates than other loans available
- Lower upfront fees
- Up to 5% assistance on down payment and closing costs
- Tax exemption on the loan
Get Your Home Loan through Us
The Mortgage Firm offers all of the common home loans you can get in Gainesville. We’re here to help you navigate these loans and find the best one that works for you. We offer all of the loans we discussed above, but we also provide information on jumbo loans, doctor loans, bridge loans, and construction loans. If you have more questions on all the mortgage loans available to you, give us a call today!