This content is sponsored by PenFed Credit Union, federally insured by NCUA.
There are many decisions to consider during the homebuying experience: the number of rooms you want, the location that’s just right for you and your family, and how to decorate or renovate the space once you’ve purchased the home. Add to that, the mortgage process and determining which type of loan is best for you.
Types of mortgage loans
There are several kinds of mortgage loans that satisfy different needs, noted the experts at PenFed Credit Union.
“There are many different types of loans including VA Loans, Jumbo loans, adjustable rate mortgages (ARMs) and more,” PenFed said. “Some of these loans are backed by the government, such as VA Loans and Federal Housing Administration (FHA) loans. However, conventional loans are not secured by the government but are offered by private lenders like PenFed.”
So how do you know which loan type is right for you?
What to know about conventional loans
“Conventional mortgage” or “conventional loan” is a term that comes up often when shopping for mortgages since it’s a common type offered by most lenders, NerdWallet said. They are the best option for borrowers with good credit who can contribute a down payment of at least 3% — or even a bit more.
The typical conventional loan homebuyer makes a larger down payment and may also be more financially secure. The National Association of Realtors noted that the average down payment for first-time homebuyers in 2021 was just 7%. For repeat buyers it was 17%.
“It’s not necessary to make a 20% down payment for a conventional loan but a larger down payment translates to lower monthly payments,” PenFed said. “Also remember that if you’re putting down 20% or more, there will be no Private Mortgage Insurance (PMI) requirement.”
Lenders generally view conventional loans as riskier because they’re not guaranteed by the government, so conventional mortgages tend to have tougher requirements, NerdWallet said. However, they can be open to more people.
“Conventional loans aren’t limited to borrowers based on income, location or military status. Anyone who is able to meet a lender’s standards is eligible for a conventional mortgage,” NerdWallet said.
What are the benefits for a conventional loan?
- Possibly pay a lower down payment
- Avoid PMI if you make a down payment of 20% or more
- Remove the monthly PMI payment if the equity in your home reaches or exceeds 20%
- Receive a flexible term length — 15, 20, or 30 years
- Use a conventional loan for your primary residence, vacation homes, and investment properties
If you aren’t eligible for a VA Loan, have a good credit score, and make a decent down payment — a conventional loan may be the best choice for you because of its attractive rates and low fees, PenFed said. Conventional loan down payments can be as low as 3%.
How are conventional loans different from other mortgage loans?
Mortgage loans like VA Loans or FHA loans are different from conventional loans because they are backed by the government, which means they are less risky for the lender.
“The FHA loan program makes homeownership more attainable for people who may not qualify for a conventional mortgage,” PenFed’s experts said. “Its unique advantages include low down payments and lower closing costs. The FHA insures the loans, allowing FHA-approved lenders to offer mortgages to home buyers that lenders may otherwise view as too risky.”
With FHA loans, interest rates are low, and you only need a 3.5% down payment, the experts at PenFed Credit Union said.
Getting an FHA loan
With these types of loans, the FHA only insures the loan — they don’t lend the money. To get an FHA loan, you have to go to an approved lender, PenFed noted.
“Applying for an FHA loan is relatively simple,” PenFed said. “Once you’ve confirmed that you meet the FHA qualifications, gather your documents for a mortgage application. Your lender will help you through the step-by-step process, including scheduling an FHA appraisal prior to closing.”
While FHA loans offer unique benefits, make sure you consider all of your options.
“FHA loans have helped millions of families buy homes they otherwise wouldn’t have had access to. But they may not be the best fit for those with excellent credit and savings for a 20 percent down payment, especially if they’re in the market for a higher-priced home,” PenFed said. “If you have an established credit history and score above 720, a conventional loan might be a better match.”
Who is eligible for an FHA loan?
- Minimum credit score of 500, but often 620, depending on the lender
- Down payment of at least 3.5 percent
- Mortgage payment to gross income ratio of 31 percent or less
- Debt to income (DTI) ratio of 43 percent or less
- Owner occupies the property as a primary residence
- Minimum property requirements are met
Who qualifies for an FHA loan is based on the FHA guidelines and requirements set by your lender, PenFed said.
PenFed adds that 20 percent down is not required for a conventional loan. If you have less than 20 percent, you will need PMI, but can still get a conventional loan. For our conventional loans, typically a FICO score of 650 or higher is required.
PenFed’s eBooks: A helpful resource
PenFed’s mortgage eBooks are available online and can help you examine you mortgage loan options when buying or selling a home. Read more and download the eBooks here.
Key takeaways
- There are several different kinds of mortgage loans – each with advantages and disadvantages.
- Ultimately, you need to research to find out the right loan option for you based on your financial situation and needs.
- You should weigh the pros and cons of the options to help take your next step in the home-buying process.
PenFed Credit Union is federally insured by NCUA.
