February 16, 2022

What Type of Mortgage Fits Your Needs

Joshua Jeans
People Operations, Mortgage and Finance Specialist


Buying a home is an exhilarating and daunting process for most people, especially those who are venturing into the world of homeownership for the first time. We know it can be tempting to jump right into your favorite website for scrolling through listings. In fact, you are probably already dreaming about how many people you can have over for your infamous game nights. But before the games can begin, it is critical that you start to strategize how you will finance the house.

There are four main types of mortgages: Conventional, FHA, VA, and USDA. Each of them serves a specific purpose, and one of them is probably the right fit for you.

Conventional Mortgages

Let’s start with Conventional mortgages. These are the most common mortgages in the U.S. Something that is important to know is that conventional loans are much more sensitive to derogatory credit than any other type of loan. This means that you might still be able to get approved for a conventional loan if your credit score is below 680, but you will likely get stuck with a somewhat high interest rate that costs you more in the long run. If you do have a solid credit history, and especially if your score is above 700 points, then a conventional loan could be a great fit. They typically require a 5% down payment and are most often for a 30-year term. If you put down less than 20%, you will need to pay for mortgage insurance, but a great advantage of conventional loans is that you will not have to pay for that mortgage insurance any longer once you have paid off 20% of your loan.

FHA Mortgage

Next in line is the FHA loan. FHA stands for Federal Housing Administration and that honestly is not super important for you to know, but here we are. FHA loans are an excellent type of mortgage for people in two different categories: folks who have lower credit scores and folks who have a smaller down payment available to them. Most lenders will allow you to get an FHA loan with a 620 credit score, while some will go as low as 580 points for their minimum requirement. FHA loans also have a down payment requirement of 3.5%, meaning that if you are buying a $200,000 home, your FHA down payment could be $3000 less than a conventional down payment. One downside of an FHA loan is that you often will have to pay for mortgage insurance for the entire life of the loan, which can be up to 30 years in most cases.

VA Mortgage

Third comes the VA mortgage. VA home loans are backed by the Department of Veterans Affairs and can be used exclusively by people who have served in the armed forces. They are much less sensitive to lower credit scores than conventional loans and they often do not require a down payment. That’s right, a mortgage with 0% down. VA loans do have what is called a funding fee that varies based on a few different factors, but it is always smaller than the 3.5% required down payment for an FHA loan. For veterans with a qualified disability status, the funding fee is completely waived. For these reasons, VA mortgages are an excellent option for those who have served in the armed forces.

USDA Mortgage

The last type of mortgage we will cover is the USDA loan. These are U.S. Department of Agriculture-backed loans that are a fantastic option for someone who is purchasing a home in a  rural part of the country. USDA loans often have a 0% required down payment and have more leniency with credit scores than conventional loans, you will just want to be sure to check that the area in which you are intending to buy is qualified for USDA loans.

Summary

Here are some quick tips for what type of mortgage fits your needs:

  • Solid credit and 5% down payment saved up? Go with the conventional loan.
  • Less-than-ideal credit and 3.5% down payment? Go with FHA.
  • You’re a veteran? The VA loan should be your first pick.
  • Headed out into the country? Go with USDA for no down payment.
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