The Quick Start: Home Loan Programs
What’s the best loan option for you? Let’s take a closer look.
Making sure you find the right home loan among all the different programs available can feel a little overwhelming. FHA, VA, USDA…so many acronyms. The thing is, different types of buyers qualify for different loan programs—and what’s right for one of us could be…well, not so right for another.
So, let’s break down some of the requirements and benefits of the typical home loan programs for first-time buyers. We’ll take a look at minimum down payments, upfront fees, mortgage insurance, and credit requirements—and the types of buyers each loan is best suited for.
- Conventional Loans
Home loans fall into two big categories: government-backed loans (like VA and FHA loans, which we’ll get to in a minute) and conventional loans. The big difference is that conventional loans aren’t insured or guaranteed by the federal government. So, if you make less than a 20% down payment, you’re on the hook to pay private mortgage insurance (PMI), so that if you default, a mortgage insurance company makes sure the lender gets paid.
Conventional loans offer competitive rates, many down payment options, and flexible terms. You can apply a conventional loan to the home you’re living in, a second home, or even an investment property—and the loan lengths are typically between 10 and 30 years. This is the kind of loan that’s available to everyone—but is more difficult to qualify for than FHA or VA home loans.
- To qualify you must have a steady income, an appropriate debt-to-income ratio, good credit, and between 3%-20%+ of the value of the loan socked away for a down payment and fees. You’ll need excellent credit to qualify for the best interest rates, though.
- FHA Home Loans
The FHA stands for Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. Just wanted to get that acronym out of the way. This is a government-backed loan, so if you default and your house isn’t worth enough to pay off the mortgage, the FHA will compensate the lender for the loss. That guarantee makes these types of loans easier for you to qualify for than a conventional loan—there’s less risk to the lender.
- How do you qualify? FHA loans are very popular with younger home buyers because they have small down payment requirements (as low as 3.5%), flexible income rules, and super lenient credit score standards. They have a maximum loan limit based on the average cost of housing in an area, but that’s typically not a challenge for a first home. Finally, you’ll have to pay a mortgage insurance premium (MIP) as part of the loan (similar to the PMI of a conventional loan)—that’s how the FHA pays for claims when borrowers have to default.
- VA Home Loans
This very specific home loan is guaranteed by the Veterans Administration (VA), and is only available to certain people through VA-approved lenders (like Alaska USA Federal Credit Union). The VA guarantee works like the FHA version—protecting the lender against loss if the borrower defaults.
- To qualify for a VA loan, you must be a current member of the U.S. armed forces, a veteran, a reservist or national guard member, or an eligible surviving spouse. If you have any type of U.S. military service in your background, this is the loan you should look at first.
If you’re on the list, you can put zero money down and you don’t have to pay any private mortgage insurance. It’s a 100% loan. The program offers very low rates and is very lenient about credit scores. You’ll have to pay a funding fee. It’s a one-time charge that’s about 1.25%-3.3% of the loan amount.
- USDA RD Loans
This program is offered by the U.S. Department of Agriculture (USDA) to home buyers who are planning on living in less densely populated areas. It’s a zero-down, 100% home loan that’s designed to promote homeownership for moderate-income borrowers for suburban and rural areas. That’s the RD part: Rural Development.
Where might that be? About 97% of the United States is within a USDA-eligible area. So, the odds are pretty good that a property nearby qualifies. But there are some strict rules about who qualifies.
- Your credit, income, and debt-to-income ratio—pretty much all the same criteria are part of the formula, just like any other home loan. The difference is that the USDA RD loan requires that you not make more than 115% of the region’s median income. So, say the median income in your area is $60,000. If you make $69,000 or less, you meet that requirement. If you make more than that, you’ll have to consider some different loan options. Also, if you have 20% in the bank to put down on the property, you can’t use USDA financing. This is a loan that’s designed for people who wouldn’t necessarily qualify for an FHA or conventional loan.
But, if you do qualify, you’ll likely benefit from some of the lowest interest rates on the market.
Those are the highlights. You made it!
All in all, this overview is just that. An overview. But, it should give you a better idea of some of the differences between home loan programs, and help you ask better questions. Speaking of questions, you should definitely make an appointment to talk with one of our home loan officers. As you work together, you’ll be able to move forward feeling informed, prepared, and confident. Maybe even a little giddy.