If you’re thinking about buying a home, one of the first things you will need to do is get pre-approved by a lender. This helps determine how much you can afford and which mortgage loan will work best. A few different factors help influence which mortgage you qualify for, including your estimated down payment, credit score, and monthly mortgage payment.
Let’s look at three of the main types of mortgage loans and some pros and cons of each.
Conventional Loans
Conventional loans are the most common type of mortgage, but they have very strict qualification requirements. They are a good choice for borrowers who want to take advantage of lower interest rates and a larger down payment.
Pros:
- Down payment can be as low as 3%
- Various property types can qualify (primary, vacation, investment, etc.)
Cons:
- Must pay private mortgage insurance (PMI) if down payment is less than 20%
- Require a minimum credit score of 620 and a low debt-to-income ratio
FHA Loans
FHA loans, insured by the Federal Housing Administration, are usually easier to qualify for than conventional loans. The government insures FHA loans, and they have specific criteria that must be met to qualify. FHA loans are great for borrowers with lower credit scores and higher debt-to-income ratios.
Pros:
- Down payment can be as low as 3.5% (if you have at least a 580 credit score)
- Typically offer better fixed interest rates than other loans
Cons:
- More restrictive loan maximums depending on how much you want to borrow
- Have a more unfavorable stigma than conventional loans when it comes to writing offers on homes
VA Loans
VA loans, insured by the Department of Veterans Affairs, help members and veterans of the U.S. Military. VA loans require you to meet service requirements in the Armed Forces or National Guard to qualify.
Pros:
- Most require no down payment
- No monthly PMI payments
Cons:
- One-time funding fee, which ranges from 1.4% to 3.6%
- Appraisal and inspection are required
As you can see, there are many different mortgage types that require different criteria to qualify. Make sure you talk with your lender to decide which loan works best. If you have any questions about mortgages, reach out to us! We would love to help!
