Home Loans Explained

Here you'll find a description of the most common types of home loans plus a few specialty programs. If you plan to pay cash, you can skip this section. Otherwise, your first step in the home buying process should be getting pre-approved for financing. This way, you'll know what loan options are available to you and what you can comfortably afford. You'll also have a good idea of how much cash you'll need for down payment and closing costs.

We highly recommend becoming fully pre-approved prior to submitting any purchase offer. A pre-qualification is little more than answering a few questions and running your credit report. It doesn't carry much weight with sellers. In contrast, a pre-approval means the lender has collected all your documentation and has run it through a desktop underwriting system and received an approval, indicating your financing is strong.

Documentation the lender will request typically includes the loan application, paystubs, tax returns, W2s, gift documentation, and employment verification. If you're talking with several lenders, you can reuse the same documentation with each. Note that having your credit report pulled multiple times will NOT have much effect on your credit score. The credit bureaus will figure out you're shopping around for the same loan, and this is expected.

Our goal at this stage is to make your financing as strong as possible and to minimize problems later on. You can use any lender you're comfortable with. We maintain a list of recommended lenders because we've had good experience with them and they take care of our clients. Please contact us if you'd like recommendations on the best lender(s) for your unique situation or have questions about the process.

Conventional Loans

A conventional mortgage is a home loan that’s not insured by the federal government. There are two types of conventional loans: conforming and non-conforming loans.

Conforming loans fall within maximum limits set by Fannie Mae or Freddie Mac, agencies that back most U.S. mortgages. The limits for 2024 are $766,550 for a single unit, $981,500 for a duplex, $1,186,350 for a triplex, and $1,474,400 for a four-plex. Loans that don’t meet these guidelines are considered non-conforming, and Jumbo loans are the most common type.

Down payments as low as 3% are available. However, you will probably have to pay for private mortgage insurance for down payments under 20%.

Conforming Conventional Loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent. They are also your primary choice when financing a second home or investment property.

Pros of Conventional Loans

• Can be used for primary residence, 2nd home or investment property
• Overall borrowing costs tend to be lower than other loan types
• You can have the lender remove PMI when your equity reaches 20%

Cons of Conventional Loans

• Minimum FICO score of 620 or higher is required
• Maximum debt-to-income ratio is 45 to 50%
• PMI is likely for down payments under 20%

Jumbo Loans

Jumbo mortgages are conventional loans that exceed conforming loan limits listed above. These are more common in higher-cost areas, and generally require more in-depth documentation to qualify.

Jumbo loans make sense for more affluent buyers purchasing a high-end home, and who have good to excellent credit, high incomes and a substantial down payment.

Pros of Jumbo Loans

• You can buy a home in more expensive areas
• Interest rates tend to be competitive with other conventional loans

Cons of Jumbo Loans

• Down payment is generally 10-20%
• Minimum FICO of 700 is typically required
• Maximum debt-to-income ratio is 45%
• You must demonstrate significant assets.

FHA Loans

FHA loans help make home ownership possible for borrowers who don’t have a large down payment saved up and don’t have pristine credit. They are backed by the Federal Housing Administration. The FHA loan limit for a single dwelling in 2024 is $498,257. FHA loans can also be used to purchase a 2-4 unit multifamily home as long as one unit is used as the buyer's primary residence. 2024 loan limits are $637,950 for a duplex, $771,125 for a triplex, and $958,350 for a four-plex. 

Borrowers need a minimum FICO score of 580 to get FHA’s maximum 3.5 percent financing. However, a credit score of 500 is accepted with at least 10 percent down. FHA loans require two mortgage insurance premiums. One is paid upfront at closing, and the other is paid annually for the life of the loan if you put less than 10 percent down. This can increase the overall cost of your mortgage.

FHA loans are ideal if you have low cash savings or less-than-stellar credit and can’t qualify for a conventional loan. You may also be eligible for a down payment assistance program such as Home In Five (this link opens a new window) to further reduce the cash you'll need for a down payment and closing costs.

Pros of FHA Loans

• You can finance a home when you don’t qualify for a conventional loan
• Credit requirements are more relaxed
• You don’t need a large down payment
• They’re open to repeat and first-time buyers
• You can buy multi-family properties up to 4 units
• 203(k) loans allow you to build in renovation costs

Cons of FHA Loans

• Mandatory mortgage insurance premiums cannot be canceled without refinancing.
• You’ll have higher overall borrowing costs
• More documentation required to prove eligibility
• Condominiums are generally not FHA-approved

VA Loans

VA loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. They do not require a down payment or PMI, and closing costs are generally capped. In addition, loan limits were eliminated in 2020 for buyers with full eligibility.

A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program’s cost to taxpayers. This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing. For buyers without full eligibility, VA loan limits mirror those of conventional loans which for 2024 is $766,550 for a single unit. VA loans can also be used to purchase a 2-4 unit multifamily home as long as one unit is used as the buyer's primary residence. 2024 loan limits for buyers without full eligibility are $981,500 for a duplex, $1,186,350 for a triplex, and $1,474,400 for a four-plex.

Pros of VA Loans

• Offer the best terms and most flexibility for military borrowers
• 100% financing, no down payment required
• No PMI required
• No loan limits for buyers will full eligibility

Cons of VA Loans

• Only available to active duty military or veterans
• Higher loan costs such as funding fee

Knock Bridge Loan™ - Buy Now, Sell Later

The Knock Bridge Loan™ is a unique program for buyers looking for a new home who also have an existing home they need to sell. These buyers typically have three options: carry two mortgages at the same time until their current home sells, write a contingency into their purchase contract that their current home must sell before they can close on their new home (which is unlikely to be accepted in a competitive market), or sell their current home and live in temporary accommodations until they close on their new home, which means moving twice.

The Knock Bridge Loan™ eliminates all these scenarios and allows buyers to purchase their new home with no contingencies before selling their current home. It is a first-of-its-kind short term loan with low fixed fees that removes your current mortgage from the new mortgage calculation, charges no interest for 6 months, gives you access to your home's equity for repairs or other expenses, and will buy your house for a predetermined price if your house hasn't sold in 6 months time. It offers convenience and certainty, and you can use your own lender and real estate agent (whose goal is to get you the highest price the market will bear).

Here's how it works:

• The loan is based on the amount of equity available in your current home
• The cost is a flat 2.25% of the estimated selling price of your current home plus a nominal fee
• These fees can be deducted from the loan itself for no out of pocket costs
• No interest is charged for 6 months
• The cash can be used to make repairs, pay off debts, or be applied to down payment and closing costs of your new home
• You have the certainty that your house will sell for no less than the agreed-upon price in no more than 6 months

More info on the program is available here: Knock Bridge Loan™

Down Payment Assistance

While there are loan programs that offer down payments as little as 3 to 3.5%, for some people - especially first time buyers - even that may be a big barrier to home ownership. A number of our lender partners have access to down payment assistance programs with a wide variety of criteria. Some are crafted for particular occupations like teachers or first responders, others have no income restrictions, and a few offer out of pocket expenditures as low as $1,000 for down payment and closing costs. Let us know if you'd like more information on these and we'll connect you with one of our lenders.

A representative program is Home In Five to get a feel for how these programs work.

Specialty Loans

There are many other types of loans available for people with unique circumstances, such as freelance and self-employed individuals that don't receive a regular paycheck and need alternative methods to qualify, or investors who want to qualify for financing based on the cash flow of the property instead of their own income and assets.  We work with a wide variety of lenders and can match you with one that has loan programs that fit your unique situation. Just ask us and we'll make the introduction!