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What Types of Loans Are Available for Buyers?

So you’re ready to buy a home – how exciting! Homeownership is a huge step in life and one that you want to ensure you’re fully prepared for. But when it comes to your home loan, how do you know where to start?


When buying a home, it's important to understand the different types of home mortgage loans that are available. By having a good idea of your options, you can ensure that you're making the choice that makes the most financial sense for you and your family. 


1. Conventional Loans

Conventional home loans are far and away the most popular residential real estate loans, comprising around 80% of new home loans in the US in 2021. A conventional loan is a mortgage that is not insured by any specific government program.


Most conventional loans are "conforming loans", which must adhere to standards set by Fannie Mae and Freddie Mac. These two government-backed entities ultimately purchase most conventional loans in the US. However, there are other types of conventional loans, such as portfolio loans, adjustable-rate loans, and jumbo loans (discussed later in this article). 


There are many benefits to conventional loans, such as higher loan limits and more flexibility, since they are not held to the same specific qualifications as the government-insured loan programs. However, because they are not guaranteed by the government, conventional loans are technically riskier so your lender may have higher down payment and credit score requirements. 


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2. FHA Loans

An FHA loan is a mortgage insured by the federal government. FHA loans have comparatively lenient guidelines compared to other home loan products, which is why this program is a good option for many first-time homebuyers.


You can usually secure an FHA loan with a lower credit score and a down payment as low as 3.5%. However, FHA loans can only be used to purchase a primary residence and do require additional mortgage insurance that will last the life of the loan.



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3. VA Loans

VA Loans are mortgages guaranteed by the US Department of Veterans Affairs. Active military who meet minimum service period requirements, veterans who meet the length of service requirements, and surviving spouses that meet certain conditions can qualify for a VA loan.


VA Loans typically have the lowest available rates, limited closing costs, and minimal (if any) down payment requirements. There are additional appraisal and reporting requirements for the property, but a VA loan can be a great option for active military or qualified veterans.



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4. USDA Loans

A USDA loan is a mortgage guaranteed by the US Department of Agriculture and can be used for homes within eligible defined rural areas. 

These loans typically have lower rates compared to a conventional loan, minimal (if any) down payment requirements, and lower mortgage insurance amounts. However, they are subject to additional underwriting guidelines, income restrictions, as well as location eligibility requirements that limit their availability. 

5. Jumbo Loans

While they are technically a type of conventional loan, Jumbo loans do have different requirements and guidelines of which to be aware.


All of the previously mentioned loan types have a pre-set limit – they are only available up to a certain dollar amount. If you are looking for a loan amount higher than any of these limits, then you may need to pursue a Jumbo Loan.

Most jumbo loans will come with additional credit requirements and underwriting guidelines. For example, many lenders may require a credit score as high as 720 and a down payment of 25% or more for jumbo loan applicants.



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Conclusion

While it may seem confusing, knowing the different types of loans available is a critical step in your home-purchasing journey. By arming yourself with the proper knowledge, you’re able to make the best financial decision possible. A licensed mortgage loan originator will be able to give you the best insight based on your specific situation and ensure that you’re able to get into the home of your dreams.  

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