What’s the best type of home loan for me? Compare mortgage options

Tim Lucas
The Mortgage Reports editor

The best type of home loan

There is no ‘right’ answer to the question, “Which type of home loan is best?”

In fact, the best answer is, “it depends.”

No two home buyers are alike, so it’s up to you and your loan adviser to choose the mortgage program that works best for you.

Today’s buyers are fortunate to have access to a wide variety of loan options. Below, you can get started figuring out which loan program might be your best option.

At the end of the day, you want something that will help you buy a house affordably. How you get there is secondary.

Find the best home loan for you (May 7th, 2021)

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Each home loan program has unique benefits that cater to a certain type of buyer. Your goal should be to find the one that matches your ‘wants’ and your ‘needs.’

Here are a few questions you should be asking yourself as you explore the different loan types:

  • Which loan has the lowest monthly payment?
  • What option requires the least amount upfront?
  • What option will cost me less over time?
  • Which loan type is suitable for my credit score?
  • How does my income affect the products for which I’m eligible?
  • What’s my price range for home buying?
  • How long do I plan to stay in the home?

Your answers to these questions will help you evaluate the different types of mortgages below and think about which one(s) could be best for your situation.

Check your mortgage options (May 7th, 2021)

Compare types of mortgage loans

  Minimum Down payment Minimum Credit Score Upfront Fees Mortgage Insurance What you need to know
VA Home Purchase 0% Officially, none, but lenders are allowed to set their own minimums 0% None Only service members, veterans and surviving spouses are eligible.
FHA Home Purchase 3.5% for applicants with credit score of 500/579 Officially, 500 for a 90% loan and 580 for a 96.5% loan. Lenders often set higher minimums. 1.75% upfront mortgage insurance premium (MIP) which can be wrapped into the loan. .85% of the existing loan balance per year for most buyers, but ranging from 45 to 1.05% FHA is not restricted to first-timers or low-income buyers.
USDA Home Purchase 0% Typically, lenders require a 640 score 1.00% upfront mortgage insurance (MIP), which can be wrapped into the loan.  .35% of the existing loan balance per year, paid monthly USDA is not restricted to first-timers or low-income buyers
Home Ready/Home Possible Purchase 3% 620 if manually underwritten, none if underwritten electronically and approved 3% 3% Offered by Fannie Mae and Freddie Mac to borrowers who meet specific income criteria or buy properties in
Other Conforming Home Purchase 3% for first-time buyers, 5% for highly-qualified repeat buyers 680%+ for LTV > 75%, 620 for LTV > 75% 3% for first-time buyers, 5% for highly qualified repeat buyers 3% for first-time buyers, 5% for highly-qualified repeat buyers 5% for highly-qualified buyers
Non-conforming (Jumbo) Home Purchase 5% for highly-qualified buyers Not standard, but generally 680+ 5% for highly-qualified buyers 5% for highly-qualified buyers  Underwriting is strict for large loans. These are not standard and must meet requirements of investor or…

Conventional mortgage

Conventional loans are the go-to choice for many home buyers today. They offer great rates, many down payment options, and flexible terms.

Many conventional loans are known as “conforming loans” because they conform to standards set by Fannie Mae and Freddie Mac.

What this means for you is that most lenders across the country offer these loans. Banks, credit unions, and mortgage companies in nearly every U.S. city are able to offer conforming mortgages at competitive rates.

Most mortgage lenders require a credit score of 620 or higher for a conventional/conforming loan.

And these mortgages come with a feature that many others don’t: Your mortgage rate is directly tied to your credit score and down payment. So the stronger your finances are, the better deal you’ll get.

Conventional loan pros:

  • Down payments as low as 3%
  • No upfront mortgage insurance fee
  • Available for all types of properties: Primary residence (the home you’ll live in), second homes, vacation homes, and investment properties
  • Fixed and adjustable rates available
  • Loan terms from 10 to 30 years available
  • Private mortgage insurance (PMI) can be canceled with 20% home equity
  • Loan amounts up to $548,250 and more in high-cost counties

Conventional loan cons:

  • Private mortgage insurance (PMI) required with less than 20% down
  • Lower credit scores mean higher interest rates
  • Smaller down payments mean higher interest rates
Check your conventional loan eligibility (May 7th, 2021)

FHA home loans

FHA loans are the favorite for many of today’s first-time home buyers. Their popularity is understandable.

With small down payment requirements, ultra-lenient credit score standards, and flexible income guidelines, the FHA mortgage is making homeownership available to a wide swath of renters.

Thanks to their backing from the Federal Housing Administration, FHA loans can be lenient with credit and income guidelines and still offer low interest rates.

FHA loan pros:

  • 3.5% down payment requirement
  • Low credit score requirement: 580 with 3.5% down or 500 with 10% down
  • Down payment gifts and/or down payment assistance can cover 100% of the down payment and closing costs
  • Lenient income qualification
  • Loan terms of 30 and 15 years available
  • Fixed-rate and adjustable-rate mortgages available
  • One- to four-unit homes are allowed; you can rent out additional units as long as you live in one

FHA loan cons:

  • Upfront and monthly mortgage insurance premiums (MIP) are required regardless of down payment
  • Mortgage insurance is not cancelable with 20% home equity
  • FHA loan limits are lower than conforming loan limits: Currently $356,362 in most areas (but higher in expensive counties)
  • The home must be a primary residence; no investment properties or vacation homes allowed
Check your FHA loan eligibility (May 7th, 2021)

VA loans

Home buyers with eligible military service history can qualify for a 100% (zero-down) loan backed by the U.S. Department of Veterans Affairs.

VA loans are often considered the best mortgages on the market, and for good reason: they offer lower rates than ‘standard’ loans, and there is never any monthly mortgage insurance required.

Buyers with any type of U.S. military service history — including veterans, active-duty service members, and surviving spouses — should consider this loan first.

VA loan pros:

  • Very low mortgage rates
  • Absolutely no down payment is required
  • No mortgage insurance
  • Very lenient about credit scores
  • 15- and 30-year fixed-rate loans available
  • Adjustable-rate mortgages available
  • One- to four-unit homes are allowed; you can rent out additional units as long as you live in one

VA loan cons:

  • Minimum service history required to qualify
  • Upfront funding fee required, ranging from 1.4% to 3.6% of the loan amount (though this can be rolled into the mortgage instead of paying upfront)
  • The home must be a primary residence
Check your VA loan eligibility (May 7th, 2021)

USDA mortgage

The U.S. Department of Agriculture backs a home loan program that goes by many names: the Rural Development (RD) loan, the Single-Family Housing Guaranteed program, or most commonly, the ‘USDA loan.’

The USDA loan targets low-income to moderate-income home buyers who plan to live in rural and suburban areas.

The program is meant to make homeownership more affordable by eliminating the down payment requirement. It also offers reduced interest rates and mortgage insurance costs.

USDA loan pros:

  • No down payment required
  • Low mortgage insurance fees
  • Below-market mortgage rates
  • Credit scores starting at 640 are eligible
  • No loan limits

USDA loan cons:

Check your USDA loan eligibility (May 7th, 2021)

Jumbo loans (‘non-conforming loans’)

What if you live in a city or neighborhood with high home prices?

Conventional loans by Fannie Mae and Freddie Mac allow generous loan limits up to $548,250, and higher in many areas. But even that amount is not enough in some high-cost areas where real estate values have soared in recent years.

A non-conforming loan, more commonly known as a ‘jumbo loan,’ falls outside of Fannie Mae and Freddie Mac’s stated loan limits. Many banks offer jumbo financing up to $2 million, $3 million, or more.

While you might think higher loan amounts would come with higher interest rates, jumbo loan rates can actually be close to or even lower than those for conventional loans. But you should expect to need a strong credit score to get approved and qualify for the lowest rate possible.

Jumbo loan pros:

  • Buy high-priced or luxury real estate
  • Fixed- and adjustable-rate loans available
  • Down payments may be as low as 5% or 10%
  • Rates are often competitive

Jumbo loan cons:

  • Good credit required; most lenders want a 680 FICO score or higher
  • Large cash reserves may be required
  • Larger loan amounts mean higher monthly payments
Check your jumbo loan eligibility (May 7th, 2021)

FHA 203k rehabilitation loan

Buying an older or ‘fixer-upper’ home can be a great way to save money on your home purchase. But you’ll need a way to pay for renovations. A 203k mortgage can help.

The 203k loan is a type of FHA mortgage that allows you to buy a fixer-upper and borrow money for repairs at the same time.

Many homes today — foreclosures, short sales, or homes on the open market — are in disrepair. Often, they don’t qualify for financing without significant work. Normally, you can’t fix up a house before you own it. It’s a catch 22.

The FHA 203k loan solves that problem by allowing you to buy the home as-is and borrow enough for rehab. Buyers often gain significant equity in the process.

FHA 203k loan pros:

  • Finance a home purchase and renovations at the same time
  • Save money by purchasing a fixer-upper home
  • Save on closing costs and hassle by covering both amounts with a single mortgage
  • Borrow up to $35,000 for renovations
  • Lenient credit score and income eligibility

FHA 203k loan cons:

  • Upfront and monthly mortgage insurance premiums are required
  • The loan is subject to FHA loan limits
  • FHA restricts the cost and types of repairs you can do (luxury improvements not allowed)
Check your 203k loan eligibility (May 7th, 2021)

Adjustable-rate mortgages

The majority of home buyers choose a 30-year fixed-rate mortgage for its stability and low monthly mortgage payments.

But if you plan to live in your home less than 10 years, an adjustable-rate mortgage (ARM) might be right for you.

ARM mortgages come with an initial fixed interest rate that lasts a set number of years. After that, your rate can rise with the market. But if you plan to move or refinance before the fixed-rate period is up, you don’t have to worry about your rate increasing.

The introductory rates on ARM loans are typically lower than the 30-year fixed option. Yet, the rate is still fixed for a certain amount of time — usually 5, 7, or even 10 years. The buyer can save a considerable amount over that time.

Plus, today’s ARMs come with built-in safeguards — called “caps” — that limit the amount the rate can rise after the initial period.

Adjustable-rate mortgage pros:

  • Get an ultra-low rate for up to 10 years
  • Potential to save thousands in interest over the first few years of the loan
  • Allows enough time to sell the home or refinance before the first adjustment

Adjustable-rate mortgage cons:

  • Your rate and monthly payment can increase after the fixed-rate period
  • This is a higher-risk option unless you’re certain you’ll move or refi before the fixed rate ends
Check your adjustable-rate mortgage eligibility (May 7th, 2021)

How to choose a home loan

The good news is, you’re not alone when it comes to choosing the right type of mortgage. Your loan officer or mortgage broker will provide expertise and guidance to help you make the best choice.

However, you should keep in mind that not every mortgage lender or broker offers every type of loan.

For instance, you might be qualified for a zero-down USDA loan — but if the lender you’re applying with doesn’t offer USDA mortgages, they might not bring this up.

That’s why it’s important to understand your options and come to the table prepared to discuss them.

Pick a few of the loan types from the list above that seem like they might be best for you. Then your loan adviser can help you compare rates, requirements, upfront fees, and long-term costs to find the absolute best fit.

Ready to get started?

Verify your new rate (May 7th, 2021)