A guide to the best loans for buying a house

Modern home buyers have an array of options when it comes to securing a loan. The goal for many home buyers is to find the best loans for buying a house that they consider their forever home.

There are many different types of mortgage loans, each offering a unique set of advantages and disadvantages. Your situation and preferences can help narrow down what type of loan is right for you.

Fixed-rate home loans

Fixed-rate mortgages are the most common type of home loan. They keep the same interest rate throughout the entirety of the loan, even if market rates go up or down. This also means that your monthly payment will stay the same.

How do fixed-rate mortgages work?

Fixed-rate mortgages are offered in a variety of terms, though 15- and 30-year fixed rate mortgages are the most popular. Since your interest rate doesn’t change, the part of your monthly payment that goes toward paying your mortgage will remain the same. That said, your property taxes and home insurance premiums may change and could increase your escrow payment.

Who should choose a fixed-rate loan?

Home buyers who prefer a consistent and predictable monthly payment and plan to stay in their forever home should consider this type of loan.

Adjustable-rate mortgages

Buyers who purchase a starter home that they plan to sell within a few years or who plan to pay off their loan early can save money by choosing an adjustable-rate mortgage (ARM). Borrowers need to meet the same credit and income standards as a fixed-rate conventional loan to qualify for an ARM.

How do adjustable-rate mortgages work?

This type of home loan is broken down into two periods: introductory and adjustment.

The introductory period

During this period, you receive a fixed interest rate that is typically lower than current market rates. After the initial introductory period, your interest rate will rise or fall based on current market interest rates.

The adjustment period

Home buyers with an ARM risk rising interest rates after the introductory period concludes. However, these types of loans include interest rate caps. Caps limit how much your interest can rise (or fall) over the course of your loan.

Your loan will include a rate cap for each year and a rate cap during the lifetime of the loan. Rate caps protect you from interest rates that significantly rise year after year.

For example, let’s say your loan has a rate cap of 7% and your interest rate has already risen to 7%. It won’t rise any further, even if market rates continue to rise. However, the interest rate floor will also prevent your interest rate from falling too low.

Who should choose an adjustable-rate loan?

Home buyers who save the most with an ARM are those who plan to move or refinance before the adjustment period. An ARM can also be a good choice if market interest rates are particularly high when you want to buy.

Conventional loans

A conventional loan is simply a mortgage loan offered by a private lender without government backing. These types of home loans generally have stricter requirements for borrowers than government-backed mortgages.

How do conventional mortgages work?

Conventional loans tend to have more stringent credit score and debt-to-income ratio (DTI) qualifications than government-backed loans. You will need a credit score of 620 and a DTI that’s less than or equal to 50%.

Many home buyers believe that they need at least a 20% down payment to buy a home with a conventional loan. It’s possible to be approved for a conventional mortgage with as little as 3% down.

This misconception about down payment expectations is likely tied to confusion related to private mortgage insurance (PMI). PMI is a type of insurance that protects lenders when home buyers can’t pay their loans. When you make a down payment of less than 20%, your lender requires you to pay PMI. The good news is that you can cancel PMI once you reach 20% equity in your home.

Who should choose a conventional loan?

Conventional loans can be a good option for home buyers who are able to meet the stricter financial requirements. They can have lower interest rates than other popular options like FHA loans. If you qualify, a conventional loan could save you money.

Non-conforming loans

Non-conforming loans are loans that don’t meet the guidelines set each year by the Federal Housing Finance Agency (FHFA). This means they can’t be bought or sold by Fannie Mae or Freddie Mac, the two main buyers of mortgage-backed securities (MBS).

Conforming vs. non-conforming loans

From a lender’s point of view, the main difference between a conforming and a non-conforming loan happens after you close on your loan. Many types of familiar loans designated as non-conforming include government loans and jumbo loans (used to buy high-priced properties).

Most conforming loans are purchased shortly after your closing date by Fannie Mae or Freddie Mac, the government-sponsored enterprises (GSEs). Selling mortgages in this way frees up funding for lenders to approve more mortgages, and it does not affect the homeowner in any way. Most mortgages are conforming loans.

FHA loan

Buyers with a low credit score should consider an FHA loan backed by the Federal Housing Administration (FHA). FHA loans are the most widely available government-backed loans.

How do FHA mortgages work?

FHA loans are offered through private lenders incentivized by government-backed home loan insurance. This is why their financial requirements are looser than other loans. Government-backed home loans offer lenders government insurance against a borrower’s default, which makes these loans less risky if borrowers can’t repay the loan. You can get approved for an FHA loan with a credit score as low as 580, with at least a 3.5% down payment.

FHA mortgage insurance premium

With an FHA loan, you need to pay an upfront mortgage insurance premium in addition to a monthly mortgage insurance premium (MIP) payment. Unlike PMI, you can’t cancel your MIP payments when you reach 20% equity.

If you make a down payment of at least 10%, MIP will be on your loan for 11 years. If you make a smaller down payment, you will pay MIP for the life of the loan. Many homeowners elect to refinance from an FHA loan to a conventional mortgage once they reach 20% equity in their property.

Who should choose an FHA loan?

FHA loans can help borrowers with past financial missteps and low or previous bad credit achieve homeownership. If you are interested in buying a home but don’t meet the requirements of a conventional loan, an FHA loan could be a good mortgage choice.

VA loan

VA loans are government-backed loans provided by the Department of Veterans Affairs (VA) exclusively for veterans, active service members of the armed forces and select surviving spouses.

How do VA mortgages work?

VA loans often have lower interest rates than comparable government-backed loans. To be considered for a VA loan, you must provide a Certificate of Eligibility (COE). A VA loan enables many applicants to buy a home with no money down and enables them to avoid PMI payments.

You will need to pay a small VA funding fee when you get your loan but select veterans may be able to get a waiver to remove this fee.

Who should choose a VA loan?

Any qualified military member, veteran or surviving spouse should consider this type of mortgage. VA loans offer tremendous benefits, making them a great option if you qualify.

Jumbo loans

A jumbo loan is a high-value loan that exceeds the FHFA conforming loan limits. Jumbo loans are commonplace in more expensive metropolitan areas of the country and often used to buy higher-cost homes, investment properties or second homes. Limits on jumbo loans vary by lender.

How do jumbo loans work?

Requirements for jumbo loans can be very different depending on the lender. These loans are often harder to qualify for than other mortgage options. Required jumbo loan down payments will vary depending on the loan amount and your credit score. You may need 10.01% down to qualify.

Mortgage lenders will look carefully at your finances and cash reserves before they approve this type of loan. Lenders may require that applicants hold 12 months or more of mortgage payments in their bank account. You also may need a higher credit score compared to other loan types.

Who should choose a jumbo loan?

What is the best mortgage for you?

The best type of mortgage for each individual home buyer will vary depending on their financial situation. That’s why it’s so important to carefully research all your options before jumping into the home buying process. It may also be helpful to speak with different lenders to find the best mortgage for you that offers you the most favorable terms on your home loan.

The bottom line: How to pick the right home loan

There are many home loan options available for those looking to purchase a home. Choosing the right loan for your situation can be confusing, especially if you’re a first-time home buyer.

Ready to find the best home loan for you? Speak with a Home Loan Expert at Rocket Mortgage^® to get started on your mortgage application.