Here you will find a description of the most common types of home loans. 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 you are 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. This is what sellers want to see as it indicates your financing is strong, and this is especially important in today's fiercely competitive buyer environment.
Documentation the lender will request typically includes the loan application, paystubs, tax returns, W2s, gift documentation, and employment verification. There may be other items they need as well. 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 here because we've had good experience with them and they take care of our clients. Please let us know if you'd like recommendations on the best lender(s) for your unique situation.
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 2021 are $548,250 for a single unit, $702,000 for a duplex, $848,500 for a triplex, and $1,054,500 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.
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 mortgages are conventional loans that exceed conforming loan limits ($548,250in 2021). 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 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 2021 is $356,362. 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. 2021 loan limits are $456,275 for a duplex, $551,500 for a triplex, and $685,400 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 5 (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 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.
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. The VA loan limit for 2021 is $548,250 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. 2021 loan limits are $702,000 for a duplex, $848,500 for a triplex, and $1,054,500 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
Cons of VA Loans
- Only available to active duty military or veterans
- Higher loan costs such as funding fee