Buying a home is a huge investment. Unless you have hundreds of thousands of dollars in cash lying around, you’ll likely need to take out a loan to finance your home purchase. But, not all real estate loans are created equal. There are several different types available, each with its own requirements and advantages.
The main types of real estate loans are conventional loans, FHA loans, VA loans, USDA loans, and jumbo loans. There are also specialty loans like construction loans and renovation loans. Let’s explore the key features of the most common mortgage options.
Conventional Real Estate Loans
Conventional loans are the most popular type of mortgage. According to the Urban Institute, conventional loans accounted for 45.1% of all mortgage originations in the third quarter of 2023. They are not backed by any government agency like the FHA or VA. Instead, they conform to guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac.
With a conventional loan, you’ll generally need a credit score of at least 620 and a down payment of at least 3%. If you put less than 20% down, you’ll have to pay private mortgage insurance (PMI) until you reach 20% home equity.
You can use conventional loans to buy primary residences, vacation homes, or investment opportunities. They offer fixed interest rates as well as adjustable rates. The 30-year fixed-rate mortgage is by far the most popular conventional loan.
FHA Loans
The Federal Housing Administration insures FHA loans. They have lower credit scores and down payment requirements than conventional loans, making them ideal for first-time homebuyers.
You can qualify for an FHA loan with a credit score as low as 500 if you put 10% down. Or you can get an FHA loan with a score of 580 and only 3.5% down. FHA loans require mortgage insurance regardless of your down payment amount.
There are limits on how much you can borrow with an FHA loan. The 2024 limits are $472,030 in most areas. You can only use FHA loans to purchase a primary residence.
VA Loans
The U.S. Department of Veterans Affairs guarantees VA loans. They are available to active duty military, veterans, reservists, and some surviving spouses.
One of the biggest benefits of a VA loan is that you don’t need any down payment whatsoever. There is also no mortgage insurance required. However, you will have to pay an upfront funding fee that can range from 1.25% to 3.3% of the loan amount.
VA loans have flexible credit requirements, but your lender may set minimum credit score standards. There are no income limits for VA loans, but your debt levels must be manageable.
USDA Loans
USDA loans, backed by the U.S. Department of Agriculture, help moderate to low-income borrowers purchase homes in eligible rural areas. Like VA loans, they require no down payment.
To qualify for a USDA loan, your household income must fall below certain thresholds set by region. You’ll also have to pay an upfront 1% guarantee fee and an annual 0.35% fee for the life of the loan.
You can only use USDA loans to purchase modest single-family homes in USDA-designated rural areas. The homes must also meet other requirements related to square footage and lot size.
Jumbo Real Estate Loans
A jumbo loan is any mortgage that exceeds the lending limits set by Fannie Mae and Freddie Mac. In most areas in 2024, any loan over $766,550 is considered a jumbo.
Because jumbo loans cannot be backed by Fannie and Freddie, lenders take on more risk with them. As such, jumbo loan borrowers generally need excellent credit scores over 700 and can be required to put down 20% or more.
The upside is that jumbo loans allow borrowers to finance very expensive properties that would not qualify for conventional or government-backed loans.
Other Real Estate Loan Types
In addition to the major mortgage categories above, there are several other more specialized real estate loans, including:
- Adjustable-rate mortgages (ARMs): Loans where the interest rate can fluctuate up or down after an initial fixed period.
- Interest-only loans: You only pay interest for the first few years before resuming normal principal + interest payments.
- Balloon loans: After an initial period of smaller payments, the remaining balance becomes due all at once.
- Construction loans: Short-term financing used to fund the building of a new home.
- Renovation loans: Allows you to roll renovation costs into your mortgage when buying a fixer-upper.
There are pros and cons to each of these more specialized loan types. An experienced mortgage lender can explain which loan is right for your specific situation.
Final Thoughts on Real Estate Loans
By evaluating your overall financial picture and homeownership goals, you can narrow down which mortgage loan types make the most sense to explore. The type of mortgage you choose will impact your monthly payments, upfront costs, and the long-term interest you pay. So, do your research and seek professional advice before making a decision.
