With a fierce competitive market, future first-time homebuyers question how to compete in this housing market. To begin, we need to understand more about the different primary home loans offered. Each loan requires certain standards and criteria to be met such as, credit, debt-to-income, and the loan-to-value ratio. It may be overwhelming to look at all these loan options, so I decided to break them down for you into four categories: Conventional, FHA, VA, and USDA loans.

1. Conventional Loans

A conventional loan is a great option for borrowers who have a strong credit history, minimal debt, a fair amount saved up, and a stable job history. Traditionally, 20% as downpayment was the standard, with shifting markets you are now able to get a conventional loan with less than 3% down.

In, addition there are two different types of conventional loans: conforming & non-conforming. The difference is that conforming conventional loans fall within Federal Housing Finance Agency. Anything that doesn’t fall within guideline is considered non-conforming.

Pros:

Downpayment with little as 3% down.

No Private Mortgage Insurance(PMI) with 20%. Anything less, will be included in a portion of your payment.

PMI can be cancelled after 80%. PMI is automatically cancelled when Loan-to-Value Ratio reaches 78%.

Can be used for first-time homebuyers, repeating homebuyers, or investors.

The flexibility of how long you want to pay your loan; 10-year, 15-year, 20-year, and 30-year options.

Cons:

Higher rates for borrowers with a low credit score. Conventional loans incentives to build a good credit rapport.

Income Limits; debt-to-income ratio.

Tougher credit guidelines. To receive the best interest rate to get, you most improve your credit.

2. FHA Loans

Also known as a Federal Housing Administration (FHA) Loan; the FHA loan is only insured and issued by FHA-approved lender. FHA loans target low-to-moderate income borrowers, cushioning their downpayment amount to their loan. Allowing people to shop with limited assets available.

In many cases, the credit score and down payment amount is lower than what many conventional loans offered. This loan is meant to help people who have limited income to start, such as first-time homebuyers. Many homebuyers love going this route due to the benefits FHA loans give.When its come to their loan period; FHA loan offers a 15 or 30-year home loan.

In addition, they offer different types of FHA loans such as; Home Equity Conversion Mortgage (HECM), FHA 203(k) Improvement Loan, FHA Energy Efficient Loan, Section 245(a) Loan.

Pros:

Downpayment with as low as 3.5%.

Better rates than conventional for low-moderate credit borrowers.

More leniency on credit score guidelines.

Lower mortgage rate insurance than conventional.

Require less credit score to get decent rate.

100% of your down payment can be a gift. While conventional loans only take 20%.

Cons:

Limitation to owner-occupied properties. This means it can’t be an investment home that you don’t reside in or it can be used to purchase a vacation home.

Loan limits based on area of region. This limits potential buying power if your future home is above the price the lender is willing to give out.

Condos are not approved. Ideally single families, multifamily, and townhomes.

Mortgage Insurance Policy (MIP)-that needs to be paid upfront and during loan period.

3. Veteran Affairs (VA) Loan

A VA loan is offered through the Department of Veteran Affairs program, and is available to active and veteran personnels and their dear loved ones. VA loans are backed by federally, however issued privately.

The great thing about VA loan [15 or 30-year] terms, is their generous incentives to begin your home-searching journey, such as no down payment, no mortgage insurance, no prepayment, and limited closing costs.

Pros:

0% downpayment required.

No private mortgage insurance accumulating.

Easier credit guidelines to apply for.

No pre-payment penalties on default.

Cons:

Limited demographic: Only for Active Duty, Reservist, and Military veterans.

Only for primary residences.

VA funding fee required, a fee upfront for the funding of the loan.

Slower closing; VA loans have a longer process. So keep in mind when shopping, that it may take a couple more days to close.

4.USDA Loans

At last, USDA loans, also known as United States Department of Agriculture is federally backed through its Rural Development Program. A USDA loan is a great choice when deciding to live more rural with the incentives the USDA loan offers.

Similar to the VA loan, there is no downpayment required, no prepayment penalty, and fair credit score. However, it does offer some changes such as, having mortgage insurance policy in place. Just like the VA loan, its tailored to primary residence, so it does have some restrictions.

Pros:

No downpayment needed.

No prepayment penalty, in case of default.

Finance closing cost covered.

Fair credit, with low interest rates.

Cons:

Restricted to rural areas only.

Max income limit.

Mortgage insurance required.

Use to only single family homes as primary residence.