Home Loan / Types of Home Loans 2023 – What are your options?

Types of Home Loans

Home loans are not all the same.

There are many different options.

Knowing what kind of home loan is most appropriate for your situation prepares you for buying a home.

Check out this guide on home loans, how to qualify, and the pros and cons of each below.

This is a very long guide. You can skip to a section listed below.

Snapshot of the types of home loans available

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Conventional Loans

Conventional loans are loans not guaranteed by the federal government. They follow the rules of Freddie Mac or Fannie Mae, but are originated by private lenders.

Conventional lenders have tougher lending requirements because of the lack of a government guarantee.

In other words, if you default on the loan, the lender loses 100% of the funds (unless you have Private Mortgage Insurance).

While you don’t need perfect credit to secure a conventional loan, good credit is a must.

Conventional lenders also require money down (3% for first-time home buyers), and decent debt-to-income ratios.

Home Possible: Only a 3% down payment requirement.

Lenders need to know that you aren’t a high risk of default before financing the loan.

Because of the lack of a government guarantee, conventional lenders require PMI for loans with less than a 20% down payment.

Unlike other loan programs, though, you can cancel PMI once you owe less than 80% of the home’s value. This happens in one of a few ways:

You make your regular payments and the lender cancels PMI when you hit 78% LTV
You request cancelation of PMI once you hit 80% and can prove you made on-time payments
You pay for a new appraisal if your home appreciated faster and request the lender cancel your PMI

Conventional Loan Limits

Updated for 2023

You may borrow up to $726,200 on a conventional loan and $1,089,300 in high-cost areas.

If you have great credit and a 20% down payment, conventional loans have the best rates and fees.

How to qualify for Conventional

Minimum 620 credit score (this varies by lender)
Minimum 3% down payment for first-time home buyers and 5% for subsequent home buyers
Maximum 47% total debt ratio (your total debts compared to your gross monthly income)
Stable income and employment for 2 years
No recent bankruptcies or foreclosures

Pros of a Conventional

The higher down payment requirement means you have more equity in the home
Great credit borrowers secure the lowest interest rates and fees
Conventional lenders may be more willing to negotiate terms
Conventional lenders have more leeway in the loan requirements

Cons of a Conventional

Low credit borrowers get hit with high-interest rates and fees (if they qualify)
Less than a 20% down payment requires Private Mortgage Insurance
Borrowers need low debt-to-income ratios to qualify compared to other programs

More Conventional Loan Information

Remaining Home Loan Options:

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FHA Loans

FHA loans are a type of mortgage for borrowers with less than perfect credit and a low down payment.

They are a government-backed loan, but you apply with a private lender.

FHA lenders must follow the FHA guidelines.

FHA guidelines are more lenient than conventional loans, but lenders must follow them closely to ensure they get the FHA guarantee.

The guarantee ensures lenders they will get paid if you default on your loan. In exchange for the lenient guidelines, though, you’ll pay mortgage insurance for the life of the loan.

Unlike conventional loans, you can’t cancel the mortgage insurance. The only way out is to refinance or pay the loan off in full.

FHA charges two mortgage insurance premiums. The first you pay at the closing, which is equal to 1.75% of the loan amount. For every $100,000 you borrow, you pay $1,750. This is rolled into the loan.

FHA also charges annual mortgage insurance equal to 0.85% of the loan amount, or $850 for every $100,000. Your lender will charge 1/12^th of the annual mortgage insurance per month to cover the annual insurance.

FHA Loan Limits

FHA loan limits vary by county. They also have a ceiling and a floor or a low and high limit.

The FHA floor is $420,680 and the ceiling is $1,867,275. Most areas fall somewhere in between these limits, though, falling in line with the conventional loan limits.

How to Qualify for FHA

Minimum 580 credit score
Minimum 3.5% down payment
Minimum 10% down payment with a credit score between 500 and 579
Maximum 50% total debt ratio (your total debts compared to your gross monthly income)
Stable income for the last 2 years
No recent bankruptcies or foreclosures
Proof you’ll live in the house as your primary residence

Pros of an FHA Loan

Low credit score requirements
Low down payment requirements
High debt-to-income ratio allowances
Lower Interest Rate

Cons of an FHA Loan

You pay mortgage insurance for the life of the loan
You can’t use the loan on investment or vacation properties
Your county may have lower loan limits than conventional loans

More FHA Loan Information

USDA Loans

USDA loans are another government-backed loan.

This loan program is for a specific demographic though as it has income limits (you can make too much and not qualify). The purpose of the USDA program is to build up homeownership in rural areas.

Before you apply for a USDA loan, determine if you’re eligible. This means two things:

Your household income is less than the maximum allowed for your area
The home is located in a rural area as determined by the USDA

When determining eligibility, you must include your HOUSEHOLD income, not just the borrower and co-borrower’s income. You must include anyone over the age of 18 who lives with you and earns money.

The USDA has specific income limits that don’t exceed 15% of the median household income for the area.

The floor limits are as follows:

1-4 family members $103,500
5-8 family members $136,500

These are the floor or the lowest limits, but limits vary based on the average income in the area (some will be higher).

USDA loans are unique because they have a 0% down payment requirement. You can borrow 100% of the home’s purchase price as long as the home is ‘reasonable for the area.’ Like FHA loans, USDA loans have flexible guidelines too.

Also like FHA loans, USDA loans require mortgage insurance upfront and over the loan’s term. At the closing, borrowers pay 1.0% of the loan amount or $1,000 for every $100,000 borrowed.

The USDA also charges 0.5% of the loan amount annually or $350 for every $100,000 borrowed.

Like FHA loans, the lender will charge 1/12^th of your mortgage insurance amount monthly.

If you default on the loan, the lender receives a portion of the funds lost after filing a claim on the USDA mortgage insurance.

The mortgage insurance lasts for the loan’s term. The only way to cancel it is to refinance the loan and/or pay the loan off in full.

USDA Loan Limits

Unlike the other loan programs, USDA loans don’t have a loan limit.

This doesn’t mean you can borrow a limitless amount, though. You can only borrow what fits within your debt-to-income ratio, which is usually much less than other loan programs since the USDA loans have an income limit.

The program is for low to moderate-income families – the idea isn’t to secure a loan for a luxurious home, but rather a home for your stability and security.

How to Qualify for USDA

Minimum 620 credit score
No down payment requirement
Maximum 29% housing ratio (your total housing payment compared to your gross monthly income)
Maximum 41% debt to income ratio (your total debts compared to your gross monthly income)
Stable income for the last 2 years
No recent bankruptcies or foreclosures
Proof you’ll live in the house as your primary residence

Pros of a USDA Loan

No down payment requirement
Flexible underwriting guidelines
You can roll the upfront mortgage insurance fee into your loan
Low and affordable interest rates and terms

Cons of a USDA Loan

Geographic limitations (the home must be rural)
You can make too much and not qualify
Mortgage insurance lasts for the entire loan term
Strict debt to income ratio requirements
Long processing timelines

VA Home Loan

VA loans are government-backed loans for veterans of the military (current and past).

VA loan is a type of mortgage loan with the most flexible guidelines, making it easy to own a home and/or refinance an existing mortgage.

Borrowers must prove their eligibility for VA loans with their Certificate of Eligibility, which you receive from the VA.

You may apply for your COE online through your eBenefits portal, or by contacting your regional VA office. If you need help, your lender may also obtain the certificate for you.

To obtain a COE, you must meet the service guidelines including:

Serve at least 90 days during wartime or 181 days during peacetime
Have any discharge other than ‘dishonorable’

You secure VA loans from VA-approved lenders (private lenders) like you would any other loan. Like VA and USDA loans, the lender must be approved by the VA and follow all VA guidelines, which are among the most flexible guidelines today.

Like FHA and USDA loans, the VA guarantees VA loans for lenders.

This means they will pay the lender back if you default on the loan.

Unlike FHA and USDA loans, though, the VA doesn’t charge annual mortgage insurance premiums.

Borrowers only pay an upfront funding fee, which is 2.3% of the loan amount. If you’re using your VA benefits for the second (or more) time, you’ll pay 3.6% of the loan amount.

Borrowers can wrap the funding fee into the loan amount, even if it makes their LTV higher than 100%.

VA Loan Limits

VA loans don’t have a loan limit as of January 2020. As long as you qualify and your debt-to-income ratio fits the requirements, you can borrow the money.

How to qualify for a VA Loan

Minimum 580 credit score (this may vary by lender)
No down payment requirement
Meet the VA’s disposable income guidelines for your location and family size
Stable income for the last 2 years
Proof you’ll live in the house as your primary residence

Pros of a VA Loan

No down payment requirement
Flexible underwriting guidelines with higher debt-to-income ratios
No private mortgage insurance
Low interest rates
VA loans are assumable (another veteran can assume your loan)

Cons of a VA Loan

You must be eligible for the VA loan (have enough service time)
The funding fee is an additional cost
Sellers sometimes hesitate with VA loans
Strict property requirements

More VA Loan Information

Jumbo Loans

As the name suggests, a jumbo loan is a loan that exceeds the standard loan limits, which for 2023 is $726,200.

While jumbo loan requirements mimic conventional loan requirements, you’ll find some differences.

Since they are not backed by Fannie Mae or Freddie Mac, each lender sets its own requirements.

Most lenders offer both fixed-rate and adjustable-rate jumbo loans and have similar qualifying requirements as a standard conventional loan.

Are you ready to apply? Start the process by completing the form below.

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