Which Type of Mortgage Loan is Right for You?

Buying a home is likely one of the biggest purchases of your life, which makes choosing the right loan type a critical step in your home buying process. Home loans are not a one size fits all product because every borrower has different needs and priorities based on their income, credit score, and down payment amount. For that reason, lenders offer various types of home loans to choose from.

But what types of mortgage loans are available and which ones do you qualify for? Use this guide to explore your options so you can make an informed choice about which loan is right for you.

Loan Type Snapshot

While specific loan requirements vary from lender to lender, here’s a rough overview to help get you started.

The five main mortgage loan types

Conventional Loans

A conventional mortgage or loan is any type of home loan that’s not offered or secured by a government entity. The loan is instead funded by private lenders, like Redfin Mortgage, or other banks/mortgage companies.

Pros: Conventional loans can be used to finance nearly any type of property, including primary residences, rental properties, or vacation homes. They tend to offer good terms and interest rates, and some even allow a downpayment of as little as 3%. However, a higher down payment usually gets you better terms, a lower rate, and reduced private mortgage insurance.

Cons: For those with low credit or poor credit history, conventional loans may be more expensive.

Best loan product for borrowers who have stable employment, a strong credit history, minimal debt, and enough available funds to make a downpayment of at least 3%-5%.

Jumbo loans

A jumbo loan exceeds the loan limits set by Fannie Mae and Freddie Mac, which are the government-sponsored organizations that buy loans from banks. Also known as non-conforming conventional mortgages, jumbo loans are riskier for lenders because they aren’t guaranteed by Fannie and Freddie, meaning the lender is not protected from losses if a borrower can’t pay off their mortgage. Jumbo loan limits can vary depending on your location, so be sure to check the limit in your local market.

Pros: The number one benefit of a jumbo loan is the opportunity to get a bigger loan to purchase a more expensive property.

Cons: Since these loans are riskier for lenders, the interest rates may be higher. Jumbo loans are also tougher to qualify for. They require a higher down payment and credit score and a lower debt-to-income ratio. A borrower must have excellent credit and usually a larger down payment to qualify.

Best loan product for borrowers with excellent credit, sufficient savings, and minimal debt who are looking for a property outside the conventional loan limits or a luxury property.

VA loans

The U.S. Department of Veteran Affairs issues VA loans to active or retired members of the U.S. Military, as well as eligible surviving spouses.

Pros: For those who qualify, VA loans offer some serious benefits. You can get a VA loan with a 0% down payment while never paying mortgage insurance, which is usually required on conventional loans with down payments under 20%.

Cons: A borrower must use the loan to purchase a primary residence that meets the "minimum property requirement." You can't buy a house that needs substantial work or a rental property with this loan. Additionally, you’ll have to pay a one-time VA funding fee, to assist with keeping the program running.

Best loan product for military veterans who've served 90 days consecutively during wartime, 180 days during peacetime, or six years in the reserves. These loans are also available to eligible and surviving military spouses.

FHA Loans

FHA loans are part of a group of loans that are backed by the federal government. This means that instead of actually lending money, the FHA offers a guarantee to banks and private lenders that they’ll cover any losses in the event that a borrower doesn’t repay their loan in full.

Because of this reduced risk, lenders can offer loans with lower down payments to borrowers who may have less than perfect credit or limited income.

Pros: FHA loans usually have favorable terms and interest rates, even if you have a lower credit score and less cash available for a down payment.

Cons: Unlike conventional loans, you can only borrow a certain amount with an FHA loan. See loan limits here.

Best loan product for first-time homebuyers with smaller down payments or lower credit scores. However, these loans are not reserved for first-time homebuyers. Homebuyers purchasing their second or third house can qualify as long as they stay within the price limit.

Redfin Mortgage does not offer FHA loans today but we offer something called HomeReady, a conventional loan product with similar benefits to FHA. If you’re looking for an FHA loan, you should discuss the HomeReady option with your lender as well.

USDA Loans

Backed by the U.S. Department of Agriculture, these loans are designed for families who want to buy a home in a rural area.

Pros: There is no down payment requirement, and USDA loans often have discounted interest rates. If you are a low income homebuyer but can show a capacity and willingness to pay back a loan, USDA lenders will usually work with you.

Cons: USDA loans come with several restrictions. For starters, this loan type is only available to those buying their primary residence in a rural area. Additionally, the borrower's debt-to-income ratio (DTI) can't be more than 41%, and borrowers must pay for private mortgage insurance. At a minimum, a borrower's adjusted income must fall at or below the applicable low-income limit for the area.

Best loan product for for low-income borrowers who want to live or live in rural areas.

Redfin Mortgage does not offer USDA loans at this time.

Choosing the right mortgage for you

Now that you have a general understanding of the different loan options, it’s time to talk to your lender. They can walk you through each product in more detail and recommend the best option for you.