How to Know Which Home Mortgage Options Are Right for You

Finding your dream home is fun, but once you’ve settled on that perfect abode, you’ll have to finance the purchase—unless you’re lucky enough to have the funds to pay in cash. Typical mortgage repayment plans are 30 years long, so choosing the right lender is essential, especially since you’re entering a long-term legal agreement. That’s why finding a lender who understands you, your needs, and which mortgage best suits you is important.

As you’ll find out, every mortgage is unique—some offer greater flexibility, lower down payment options, and looser qualification guidelines than others. That said, here are the most common mortgage options.

Conventional

The federal government does not insure conventional loans, so they have stricter qualification criteria. To qualify for a conventional loan, borrowers should have a credit score of 620 or higher and a debt-to-income ratio of no more than 50 percent.

Additionally, you must carry private mortgage insurance unless you can produce a 20 percent down payment. Otherwise, you may be able to qualify by only making a three percent down payment—so long as you have good credit and a stable employment history.

FHA Home Loans

FHA loans are a solid option for first-time home buyers who may not qualify for a conventional loan. FHAs are insured by the Federal Housing Administration and designed for borrowers with lower credit scores or who need more funds to make a traditional 10-20 percent down payment.

To qualify for an FHA loan, you’ll need to provide pay stubs, W2s, federal tax returns, and bank statements, just as you would with a conventional loan. Additionally, your property must be inspected by an FHA-approved inspector.

VA Home Loans

If you are a military service member or the spouse of one, a VA loan may be right for you. VA home loans offer zero-down-payment options and competitive interest rates. Eligible borrowers must have served at least 90 days during wartime, 181 days during

peace, or six years in the Reserves or National Guard.

While the VA does not set specific credit score or debt-to-income (DTI) ratio requirements, borrowers should have a minimum credit score of 620 and a DTI of no more than 41 percent.

USDA Loans

If you’re shopping for a home in a rural area, a USDA loan may be the right fit for you. One of the biggest perks of USDA loans is that they are government-backed—which means you do not have to make a down payment.

Borrowers must have a credit score of 640 or higher and show stable income, which is 115 percent of the median income in their area, to be eligible. Lastly, the home must be your primary residence in a USDA-approved rural region of the country.

Fixed- and Adjustable Rate Mortgages

Fixed-rate mortgages are popular because they offer stability and predictability. Why? Once you lock in your interest rate, it remains unchanged for your loan period—typically 30 years. This predictability makes it easier for borrowers to budget and stay current with their payments.

Adjustable rate mortgages begin with a fixed interest rate that remains in place for a set time—up to 10 years. After that, interest rates fluctuate with the market. These loans are popular because they offer lower interest rates than adjustable-rate mortgages—at least initially. Plus, they offer the potential for savings; if interest rates decline, borrowers may benefit from reduced interest and lower mortgage payments.

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