Mortgage loans aren’t something we are all thoroughly familiar with, and with good reason. It’s not often we shop for or decide to learn more about mortgages.
So here’s a crash course in the main 4 mortgage options, FHA, VA, and USDA, and conventional.
Now how to pick which is right for you? That will determine your down payment, minimum credit score, and other necessary requirements.
Making the right choice can be intimidating, especially if you’ve never bought a home before. Your lender will ultimately help you make the right decision for you and your needs, but this should help explain the differences so you know a bit more heading into those lender conversations.
FHA mortgages are one of the most popular loan options, especially with first time buyers. FHA loans are insured by the Federal Housing Administration. This option does allow for lower credit scores than most other loans. In fact, with some lenders, you may actually be able to get approved with a credit score as low as 500 (with a minimum 10% down payment).
However, the one caveat with FHA loans is that they require a Mortgage Insurance Premium both at closing and as part of your monthly payment. This exact cost varies based on your loan balance
and down payment.
Minimum down payment: 3.5%
Minimum credit score: 500 to 580, depending on down payment size
Who they’re best for: First-time homebuyers, low-credit score buyers
VA loans are mortgage loans that are guaranteed by the Department of Veterans Affairs. Only homebuyers who are military veterans, current
military members or their spouses can qualify for a VA loan. Applicants also need to meet certain service requirements, as well as obtain a Certificate of Eligibility from the VA.
VA loans come with some of the lowest interest rates around, and there are also no minimum credit score or down payment requirements.
Minimum down payment: Zero
Minimum credit score: None
Who they’re best for: Veterans, military members, spouses of veterans and military members
USDA loans are mortgages backed by the U.S. Department of Agriculture. They’re reserved for buyers in more rural parts of the country, and they’re only available in certain areas. Borrowers also need to fall under the set income threshold for their community. Like VA loans, USDA loans require no down payment.
Minimum down payment: Zero
Minimum credit score: Typically 640, though it varies by lender
Who they’re best for: Rural homebuyers, low-income buyers, buyers who have no
down payment savings
Conventional mortgages are loans issued without any government insurance or backing, like the above loan options. This means lenders are more strict with requirements that must be met to qualify for these loans.
Generally, though depending on the lender, conventional mortgages require higher credit scores. Down payments available as low as 3% However, PMI (Private Mortgage Insurance) is typically required when your down payment is less than 20%. The PMI on conventional loans is cancellable after you’ve got a minimum of 20% equity in your home.
Minimum down payment: 3%
Minimum credit score: Typically 620, though it varies by lender
Who they’re best for: Buyers with good credit
Now that you’ve completed your loan options crash course, you should have a better idea of things once you speak to your lender and start putting together a plan.
Also, keep in mind different lenders often have access to grants, down payment assistance programs, and more. I always suggest speaking to at least 3 lenders before making a decision with who you want to continue with.
I have some amazing local lenders that buyers and myself have used and been very happy with. Give me a call and let’s get you on a plan to homeownership!