Have you been renting an apartment for years and you are tired of hearing your upstairs neighbor stomping around in their living room? Is it time to move out of your parent’s house now that you have a solid job and can afford a down payment on a home? Has your young family outgrown the townhome where you had your first child?
Whatever the case may be, there comes a time for many of us when buying a home is the best next step. Though some may be satisfied with renting properties for their entire lives, others prefer the privacy, investment opportunity, and customization possibilities that owning a home provides.
The problem is that buying a house can be very expensive, especially the initial costs. It might seem easier to just keep paying rental installments each month rather than saving for a large down payment and earning enough to cover all the ongoing expenses. However, the benefits often outweigh the costs, so it is important to understand what home loan products are available to help you finance your purchase.
Conventional Loan
Most homebuyers in America will take advantage of a conventional conforming loan to purchase their homes. This is the most common type of mortgage because it is widely available to anyone provided they meet the requirements. Most lenders have similar standards for borrowers who want a conventional conforming loan. You must have a credit score of at least 620 to demonstrate that you reliably pay back your debts. For a down payment, the minimum is usually around 3.5% of the total cost of the home. However, if you can shoot for a 20% down payment, then you can avoid extra fees like mortgage insurance. You must also have a steady income and a decent debt-to-income ratio for lenders to feel safe granting you a conventional loan.
Jumbo Loan
A jumbo loan is a type of conventional loan, but it is considered non-conforming. Conventional loans are those that are not backed by a government entity like the FHA or the VA. However, there is a limit that determines if a loan is conforming or non-conforming. Two real estate organizations that are regulated by the government are known as Fannie Mae and Freddie Mac. These two entities buy mortgages in the secondary market, but only up to a certain amount. In 2024, that number is $766,550, though it could be higher in competitive markets. If you need a loan for a higher price than that limit, you are applying for a jumbo loan. There are numerous jumbo loan pros and cons to weigh, but the primary benefit is being able to afford more expensive homes. However, there are far stricter standards, such as a credit score of 720 and a higher down payment requirement.
FHA Loan
Some mortgages are insured by government entities to make them more affordable than their conventional counterparts. One of the most common is an FHA loan, which is backed by the Federal Housing Administration. An FHA loan has several benefits that help people afford homes who ordinarily might not be able to. First, there is a lower credit score requirement of 580. Second, interest rates tend to be lower for FHA mortgages, which means your monthly payments and total loan balance will also be lower. Third, your debt-to-income ratio does not have to be perfect, though it should still be low enough that you are not considered at risk of default.
USDA Loan
If you have a lower credit score or limited income, then you could use a loan from the United States Department of Agriculture to purchase a home in a rural area. These loans have similar benefits to an FHA mortgage, but they only apply to houses in rural settings. USDA loans have zero down payment requirements and often come with much lower interest rates than conventional loans, making the path to homeownership far easier. Since the homes you can look at may not be in as great of a condition, it is important to look for certain things when shopping for houses in rural areas.
VA Loan
If you are a veteran, active-duty service member, or surviving spouse of a veteran, then you could qualify for one of the best loan programs out there. VA loans have no down payment requirements, no mortgage insurance premiums, and lower interest rates. As long as you qualify with a certificate of eligibility, then you can obtain these highly beneficial loans to make your home purchase much more affordable. This is a great way to purchase your first home to take advantage of significant savings so that building equity in the property is easier.
Every Home Loan is a Way to Invest and Build Equity
Every mortgage product on this list is simply a means of acquiring your home. Once you own it and start making payments, equity starts to increase. The longer you stay in the home and make your payments, the more equity you will have. Then, you can use that equity to either refinance for cash, take out a home equity line of credit, or sell the home and make a larger profit. Using a home loan to purchase your house is an investment in the future.
