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Finding a great deal on your home purchase requires that you understand the different types of home loans available. Here are popular mortgage products and who can use them.
- Conventional Loan: This is most popular type of loan and the one that most people think of when beginning their home search. To get a conventional loan, you should have a sizable down payment (20% of the purchase price is typical but you can have a lower down payment if you are willing to pay for private mortgage insurance), a high credit score, and a low debt-to-income ratio. If you choose a fixed-rate conventional loan, your interest rate will lock in at the time of purchase and remain the same for the entire loan.
- Adjustable Rate Mortgage (ARM): With similar qualification standards as a conventional loan, this is a good option for those with a sizable down payment, good credit, and a low DTI who will likely sell or pay off their home quickly. An ARM loan begins with a low interest rate, which the lender has the option to increase at periodic increments over the life of the loan (with a cap).
- USDA Loan: This is a government-secured loan, meaning that the USDA guarantees the lender will be paid as an incentive for people who purchase in rural or some suburban areas. You do not need to have any money for a down payment and are not required to pay PMI, but the home must be in an area that qualifies for this type of mortgage and have good credit.
- VA Loan: Another government-secured mortgage product, VA loans are available to veterans, military members, members of the National Guard, and some surviving military spouses. You will pay a small fee to cover processing but do not need to have a down payment or pay PMI. There are a few restrictions for how you can use a home that you have purchased with a VA loan, such as a 60-day move-in timeline requirement and primary residence requirement.
- FHA Loan: This is a great loan for those with less money for a down payment or a lower credit score. You can put down as little as 3.5% using an FHA loan, but you will pay for mortgage insurance for the life of the loan in many cases.
- Jumbo Loan: If you are trying to purchase a very expensive home, you may need to use a jumbo loan. The terms are often similar to a conventional loan, with higher loan limits.
You should discuss your options with your lender to determine which mortgage product will work best for you and your new home purchase.