Home Buying 101: Types of Home Loans

One of the most important steps you take at the beginning of your home buying journey is getting prequalified for a mortgage. During this process, you will provide your mortgage lender with information about your income, assets, and permission to pull your credit, and in turn, they will discuss the type of home loan that works best for your financial circumstances and the home you wish to buy.

Generally speaking, there are two overarching categories or types of home loans – government-backed mortgages and conventional mortgage loans. Each type has strong advantages for different people, and our lender partners can help you determine the right mortgage for your needs.

Conventional Mortgage Loan

Conventional mortgage loans are loans that are not backed by a government agency, though often lenders follow requirements from Fannie Mae and Freddie Mac, which are government-sponsored companies that buy and guarantee mortgages, so they may sell loans to these companies. In addition, lenders may have their own requirements (also known as overlays) for homebuyers to meet.

Conventional loans are available for purchase or refinance. The most popular term is a 30-year fixed-rate conventional mortgage, though 10-year, 15-year, and 20-year fixed-rate mortgages and adjustable-rate conventional mortgages are also available. 

To qualify for a conventional mortgage, you typically must meet these minimum requirements:

• Credit score: 620 minimum
• Debt-to-income ratio: 45% or less (stipulated by Fannie Mae and Freddie Mac)
• Down payment: As low as 3% of the purchase price

While low down payment conventional mortgages are available, one huge benefit of putting 20% down is you do not have to pay any private mortgage insurance (PMI). Those who put less than 20% down are required to pay PMI until you reach 20% equity in the home.

FHA Loan

The Federal Housing Administration provides the most common type of government-backed mortgage, the FHA loan. A popular type of home loan for first-time homebuyers (though also available for repeat buyers and homeowners looking to refinance), FHA loans have less stringent requirements than a conventional loan.

To qualify for an FHA loan, you typically must meet these minimum requirements:

• Credit score: 580 minimum (with a 3.5% down payment)
• Debt-to-income ratio: 50% or less, though may vary depending on your credit score and other factors
• Down payment: A minimum of 3.5% of the purchase price - Allowed to be gift money

Some buyers with lower credit scores can also qualify for an FHA loan, but a 10% down payment is required and it can be tough to get underwriting approval.

With an FHA loan, the home must be occupied as your primary residence and meet price and property requirements, which are set by the government based on the county in which you are purchasing. 30-year fixed-rate, 15-year fixed-rate, and adjustable-rate FHA mortgages are available.

FHA mortgage insurance is built into every loan. You will pay a one-time upfront mortgage insurance payment (which can be rolled into your loan), and monthly mortgage insurance is paid as part of your total mortgage payment. When you put less than 10% down, this mortgage insurance is paid for the life of the loan. 

VA Home Loan

As a thank you to those who serve our country, VA home loans offer favorable terms to military veterans, active service members, and eligible surviving spouses. Private lenders provide VA home loans, and the Department of Veterans Affairs (VA) guarantees a portion of the loan. 

To qualify for a VA home loan, you typically must meet these minimum requirements:

• Valid Certificate of Eligibility (COE)
• Credit score: No official requirement from the VA, though a 580 minimum is typically required by our lenders
• Debt-to-income ratio: 50% or less, though may vary depending on your credit score and other factors
• Down payment: A minimum of $0

In addition to having no down payment required, VA loans do not require any PMI, and have competitive interest rates that are on par with other mortgage products. 30-year fixed-rate, 15-year fixed-rate, and adjustable-rate VA mortgages are available.

There is a one-time upfront VA funding fee of 1.4-3.6% of the purchase price. The percentage varies depending on your down payment and whether this is your first or subsequent use of a VA loan, and may be waived for those with a service-connected disability, as well as in some other scenarios.

VA home loans are available for both purchase and refinance, and for first-time homebuyers and repeat homebuyers. To be eligible for a VA loan, there are a number of requirements set by the VA - A full list of those requirements can be found online on the U.S. Department of Veterans Affairs website.

USDA Loan

The third type of government-backed loan is the USDA loan. Less widely used though a popular choice for those who qualify, USDA loans are guaranteed by the US Department of Agriculture, limited based on income, and available only on homes in designated eligible areas. 

To qualify for a USDA Section 502 Guaranteed home loan, you typically must meet these minimum requirements:

• Household income must not exceed 115% of the area’s median household income
  • In our Florida communities, the current limit is $90,300 for a household with 1-4 people and $119,200 for a household of 5-8 persons
• Credit score: No official requirement, though a 580 minimum is typically required by our lenders
• Debt-to-income ratio: 29% PITI / 41% total (with automated underwriting)
• Down payment: A minimum of $0

Some buyers with a debt to income ratio of up to 44% may qualify with manual underwriting and compensating factors, though additional requirements apply for employment and financial reserves.

The home must be occupied as your primary residence and meet price and property requirements, which are set by the government based on the county in which you are purchasing. USDA Section 502 Guaranteed home loans are available only with a 30-year fixed rate. 

While USDA loans do not have PMI, they do include what the USDA refers to as funding fees, which guarantee loan losses are paid through the fees collected rather than taxpayer funds. Currently, borrowers are required to pay a one-time upfront guarantee fee of 1% of the loan amount, and an “annual” fee of 0.5% of the loan amount, which is paid as part of your monthly mortgage payment for the life of the loan. 

Additional Information

If you’re starting your homebuying journey and want to learn more about your personal financial situation, homebuying power, and the right type of home loan for your needs, your first step is to get prequalified with a Highland Homes lender partner! They will discuss your credit report, find out more about your needs, and let you know the types of home loans, interest rates, and mortgage options that best suit you. In addition, they may be able to help you qualify for Florida down payment assistance programs to help cover your down payment and other purchase costs. 

Highland Homes builds new homes in Tampa Bay, Metro Orlando, Ocala, Sarasota-Bradenton, and Lakeland-Winter-Haven. For more information about building your dream home in Florida, contact our Florida New Home Specialists by phone or email.