Comparing home loan options: Which one suits you best?

April 04, 2024

By Alliant Credit Union

Comparing home loan options: Which one suits you best?

Young woman stands on her apartment balcony with cup of coffee, comparing home loan options for her next residence.

Home loans are fundamental to the home-buying process, since they allow you to purchase your home without having a lot of cash. Finding a home loan that suits your financial needs is essential to avoid overwhelming debt and ensuring you can enjoy your new home for years. Whether you’re a first-time home buyer or an experienced real estate investor, learning about the different types of home loans will help you decide which one suits you best.

Options for home loans

Conventional loans

A conventional loan is popular among home buyers. With this loan type, you enter a contract that conforms to Fannie Mae and Freddie Mac standards, which means it’s available nationwide. Conventional loans also offer flexibility regarding rates and down payments. In most cases, qualifying for a conventional loan requires a credit score of at least 620, and the mortgage rate you secure will depend directly on your credit score and the down payment you can afford.

Veteran Affairs (VA) loans

VA loans are only available to members of the military. Members must meet a few requirements to qualify for this loan type, such as being an active-duty service member with at least 90 consecutive days of duty. You can also qualify for a VA loan if you’re a veteran, the surviving spouse of a military member who died in service, or a member of the National Guard or Reserve. These loans don’t require a down payment and have no loan limits.

Federal Housing Administration (FHA) loans

FHA loans are helpful for borrowers with low credit scores and low down-payment options. This often applies to first-time home buyers or those who haven’t yet built a credit record. While beneficial due to their low rates and down payments, the FHA also stipulates you take out FHA mortgage insurance to ensure you don’t default on the loan. FHA loans typically have lower limits than conventional loans, so your choice of property may be restricted.

United States Department of Agriculture (USDA) loans

If you want to buy a home in a rural area, a USDA loan might be your best option. These loans offer mortgages with zero down payment for borrowers buying property in a rural community. To be eligible for this loan, you must purchase in an area that’s designated as rural by the USDA, so check these requirements every five years when the organization reviews its standards.

USDA loans use your total household income to set the terms, though some lenders require a credit score of at least 640 to qualify. There’s also a maximum debt ratio of 41%, a guarantee fee of 1% upfront, and a stipulation that the home must be your primary residence.

Adjustable-rate mortgages

An adjustable-rate mortgage is a good option for homebuyers who don’t plan to stay in their new homes for very long. Adjustable-rate mortgages offer initial fixed interest rates that remain consistent for a set period before increases in the real estate market. However, if you only plan to reside in the home for five or 10 years, you’ll likely be able to avoid the rate increase by leaving your property before the new rate takes effect.

Jumbo loans

Jumbo or non-conforming loans offer mortgages that exceed conforming loan limits, so borrowers can take out bigger mortgages on properties. For example, some jumbo loans may finance mortgages for multi-million-dollar homes. While these loans have many benefits, they require large cash reserves to cover the high monthly payments.

How to compare home loans

Here are ways to compare home loans and determine which one suits you. Gather your tax returns, bank statements and records of debt. Bring these documents with you when meeting with lenders to help them determine the terms of your loan. Meet a few different lenders and get estimates for the mortgages you can secure with each one. You could also compare mortgage rates online using your details or meet with a mortgage loan officer who can provide a detailed comparison of different loans.

While conventional loans are the most common, you should evaluate the benefits of each loan type to decide which is best for you. Whether you’re a first-time buyer opting for an FHA loan or a military member starting a VA loan, you can secure your dream home without breaking the bank by choosing the right home loan. If you have questions about different types of home loans or other financial decisions, contact an Alliant home loan officer today for personalized guidance from a loan expert.

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