Guide to Home Loans

Buying a new home is a major milestone and a significant financial investment, and many homebuyers rely on home loans for funding for their purchase.

Home loans, also called mortgages, are vital to the housing market because it allows people to purchase homes before they have enough cash to buy a home with an upfront payment.

There are a variety of mortgage options available for home buyers, including some that are subsidized government housing assistance programs.

While conventional loans are the most popular option, mortgages for rural housing, veterans, individuals with disabilities and other categories of loans are also available.

Many of these government funded programs provide housing grants to local agencies so that they can help low-income families fund the purchase of a home.

There are a number of federal and local housing assistance programs that provide mortgages to homebuyers, and knowing how they work can make it easier to find the best option.

Read more to learn about home loans so that you can make the home buying process much easier in the long-run.

Learn About Credit Score Requirements for Housing Loans

Since lenders are accepting a financial risk when they generate loans for home buyers, they will generally have a credit score requirement for borrowers.

Generally, a higher credit score signifies that the borrower is more likely to make timely payments on their loan.

It is therefore important for potential borrowers to check their scores before applying for loans.

Borrowers with a high credit score are more likely to receive better interest rates and loan terms.

Some general minimum credit score requirements that homebuyers can expect are:

  • Conventional loans – Borrowers are generally required to have a credit score of 620 or higher.
  • FHA loans – Since FHA loans are government insured, they have a more lenient credit score requirement of around 580. Although, they may accept credit scores between 500 and 579 in certain circumstances.
  • VA loans – Typically, a credit score of 580 or higher is required.
  • USDA loans – These loans generally require a credit score of 620 or higher.

Learn About Conventional Home Loans

Conventional home loans are mortgages generated by private lenders without any backing or insurance from any government housing programs or grants.

These conventional mortgages are usually the most popular housing loan option.

Although these loans carry more risk than a government-subsidized mortgage, they offer consumers with good credit a number of benefits such as:

  • Higher loan limits than many government subsidized loans.
  • Lower interest rates for consumers with very good credit scores.
  • Consumers have the option of choosing between adjustable-rate or fixed-rate mortgage terms.
  • Conventional home loans can be used to purchase a second home or investment property.
  • Borrowers who place over 20 percent down payment on their loan may not have to pay for private mortgage insurance.

Learn About Veterans Affairs (VA) Home Loans

Retired military service members are granted housing assistance benefits from the U.S. Department of Veterans Affairs (VA) in the form of subsidized home loans.

In fact, these VA home loans often have some of the lowest interest rates out of all mortgage options.

These loans are typically offered to active personnel, veterans, National Guard members and reservists who meet the eligibility requirements.

In some cases, the surviving spouses of military service members may also be eligible for loans from the VA.

Veterans Affairs home loans are incredibly beneficial because:

  • Eligible homebuyers are not required to place a down payment in most cases.
  • VA loans offer beneficiaries the lowest interest rates out of all housing loan options.
  • VA loans can be paid off in advance without any prepayment penalties.

Eligible veterans will be able to obtain a VA-backed home loan and they will even be granted access to certified loan technicians and financial counselors for assistance with applying for loans.

After meeting all of the eligibility requirements, veterans will receive a Certificate of Eligibility (COE), which they can take to their lender for access to a VA loan.

The Department of Veterans Affairs aims to provide veteran’s with purchasing power and making homeownership more accessible when they transition back into civilian life.

Note: VA home loans are only offered to veterans who received an honorable discharge from military service.

Learn About Federal Housing Administration (FHA) Home Loans

Housing loans that are insured by the Federal Housing Administration are called FHA loans.

Home loans backed by the FHA are popular with homebuyers looking to purchase their first home because they have a lower minimum credit score and down payment requirements than other mortgage options.

FHA loans are incredibly helpful for loan seekers with low-to-moderate income because it allows them to purchase a property without making a large down payment.

Typically, homebuyers are expected to make a down payment between 10 and 20 percent of the purchase price of the property.

FHA loans help to significantly reduce the immediate financial obligations of purchasing a home.

The Federal Housing Administration insures certain loans offered by private lenders and banks, which allows them to lower their minimum credit score requirements.

FHA loans are a good option for home buyers who have a low credit score because of their more lenient eligibility requirements.

However, these types of mortgages also tend to have higher interest rates than conventional loans.

Borrowers who accept an FHA loan are also required to purchase mortgage insurance, regardless of how much money they pay as a down payment.

These loans are only offered to buyers looking to purchase a new primary residence.

Learn About USDA Home Loans

Another beneficial mortgage option is a USDA home loan, which is a loan subsidized by the U.S. Department of Agriculture (USDA).

These loans are subsidized by the federal government in an attempt to assist in the development of rural areas of the United States.

USDA mortgages generally have the best down payment and interest rate terms out of all the home loan options.

These loans are typically provided to low-income applicants looking to move to rural areas of the country.

The threshold and limits for what is considered low income can be different depending on the area of the country.

Some general requirements for a USDA home loan include:

  • U.S. citizenship or legal permanent residency.
  • Borrowers must make a monthly payment of 29 percent or less of their household’s monthly income. This includes a mortgage:
    • Principal.
    • Interest.
    • Insurance.
    • Additional taxes.
  • An acceptable credit score and history.