Your Guide To The 9 Best Loans To Buy A House With

Buying a home is one of the most exciting experiences you will go through in life. From envisioning your dream home to planning for your future, it’s a journey that’s full of possibility. It’s also a journey that’s full of options.

After a quick online search for homes, you will realize that the different types of properties available are seemingly endless. From lake houses to apartments to horse farms to vacant land, the list goes on and on. Deciding what’s right for you can be tough.

When it comes to finding a loan to finance your new abode, the options are plentiful as well. This can be daunting, especially for first-time homebuyers. But fear not! Here we’ll take you through the nine best loans to buy a house with and help you decide the one that’s right for you.

What Is The Best Loan For Buying A House?

For starters, you ‘ll need to consider your home-buying goals, current financial situation and a myriad of other variables when determining the best type of home loan to buy a house with. It’s similar to deciding what you want in a home.

You’ve likely poured over options for your new abode, including how many bedrooms and bathrooms you want, what type of home style you like, and the area you’d like to live in. Choosing a mortgage is not all that different. It all comes down to fit.

Start with your budget. How much can you afford to spend on a mortgage each month? How much do you want to spend? How do you anticipate your household income changing in the future? Consider your financial standing. How much do you have in your savings? What’s your credit score and history? How long do you want to make mortgage payments? Creating a clear financial picture, both current and looking forward, will set you up for success when it comes time to decide on the best type of loan to use to buy your next house.

Here are nine types of loans you should consider based on your financial goals and needs. When purchasing a home, you may want to consider: fixed-rate home loans; adjustable rate mortgages (ARMs); conventional loans; Federal Housing Administration (FHA) loans; U.S. Department of Veterans Affairs (VA) loans; U.S. Department of Agriculture (USDA) loans; jumbo loans; 30-year loans and 15-year loans.

Remember that lenders may not offer all of the loans mentioned below. For example, our sister company, Rocket Mortgage^® doesn’t offer USDA loans.

Fixed-Rate Home Loan

The key feature of fixed-rate mortgages is that the interest rate is – you guessed it – fixed. That means the interest rate is the same when the loan begins and when it ends. When you lock in your interest rate shortly before buying your house, you’ll pay that same interest rate for up to 30 years – depending on your loan term – until you pay your home off completely.

National interest rates fluctuate based on several economic factors. For this reason, many home loan borrowers like the security of a fixed-rate home loan. No matter what happens to the national and global economy, their rate won't change.

There are both advantages and disadvantages to buying a house with a fixed-rate mortgage. Let’s review the pros and cons so you can make the best choice for you.

Pros Of Fixed-Rate Mortgages

• Your mortgage payments are the same each month for the entirety of your loan (excluding escrow).
• A portion of your monthly payment will always go toward the principal loan balance, helping you pay down the loan and build equity with each payment.
• A shifting market with shifting interest rates won’t affect the interest you pay on your home loan.

Cons Of Fixed-Rate Mortgages

• Interest rates can be higher than an ARM.
• Fixed-rate mortgages can be harder to qualify for compared to other types of mortgages.
• With a 30-year mortgage, you’ll pay off your principal more slowly than with other types of mortgages.

When You Should Use This Loan To Buy A House

If you can qualify and you are interested in a stable monthly payment for the length of your loan, you may want to consider using a fixed-rate mortgage to buy a house. A national economic forecast of spiking interest rates may also be a good time to consider this type of mortgage.

Adjustable-Rate Mortgage (ARM)

Unlike a fixed-rate mortgage, an ARM has a rate that can fluctuate over time. This fluctuation only occurs during a specific period, though, known as an adjustment period. The two main periods of the loan are:

• Fixed-rate period: The rate does not change, much like a fixed-rate mortgage.
• Adjustment period: The rate can change during this period.

There are a number of different ARMs with varying rate schedules, including a 5/1 ARM or a 7/6 ARM. A 5/1 ARM means you’ll have a low, fixed interest rate for the first 5 years and then your rate will adjust annually, or once per year. A 7/6 ARM means you’ll have a low interest rate for the first 7 years and then your rate will adjust every 6 months. There are many more shapes and sizes when it comes to ARMs, but you get the idea.

Pros Of Adjustable-Rate Mortgages

• Low interest rate for the initial loan period.
• Low rates in the beginning could mean you might qualify for a larger loan.
• If interest rates drop nationally, yours might too during the adjustment period.

Cons Of Adjustable-Rate Mortgages

• Your interest rate is not stable.
• In the long term, they could cost you more money than fixed-rate mortgages.
• Depending on the market, your monthly home payment might go up significantly.

When You Should Use This Loan To Buy A House

If you want to lock in a low rate and don’t mind if it raises later – or if you plan to move before your fixed-rate period ends – this might be a good loan option. Also, if economic forecasts predict lower interest rates this also might be a good loan to consider.

Conventional Loan

As you may have guessed by the name, conventional loans are the most common type of loans people use to buy homes. Conventional loans are offered by private lenders and do not offer backing from any government agencies. Conventional loans can, however, be sold to the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

To qualify for a conventional mortgage, you’ll need to meet certain borrower requirements that vary by borrower, lender and loan terms. These variables include loan amount, down payment amount, credit score, savings, income and debt-to-income ratio.

Pros Of Conventional Mortgages

• There are low down payment options.
• You may have more flexible terms.
• They offer more affordable financing.

Cons Of Conventional Mortgages

• They are not backed by a government agency.
• There may be restrictive borrower requirements.

When You Should Use This Loan To Buy A House

Many Americans use this type of loan, so it stands to reason that it works for many situations. Economic factors and varying borrower needs can change, of course, but the time to use a conventional loan is typically pretty immune to these variables.

FHA Loan

FHA loans are backed by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development (HUD). This means the FHA insures the loan in case the borrower defaults, creating less risk for the lender. In turn, the lender may have more flexible borrower approval requirements.

The loan is issued by a private lender, just like a conventional mortgage. The credit score minimum can be as low as 500, but some lenders may require a higher score. For example, Rocket Mortgage requires a credit score of at least 580. The down payment minimum is 3.5%.

Pros Of FHA Mortgages

• There’s a lower minimum down payment.
• There are lower credit requirements.
• These loans are backed by the FHA.

Cons Of FHA Mortgages

• Safety requirements related to the home can delay closing.
• FHA loans are more unfavorable to some sellers.
• You can't use an FHA loan to buy an investment property or a second home.

When You Should Use This Loan To Buy A House

If you don't have a lot of money saved for a down payment on a house or if your credit score is a little lower than you’d like it to be, an FHA loan might be a good option for you.

VA Loan

VA loans are backed by the U.S. Department of Veteran Affairs. Like FHA loans, this means the VA insures the loan against default. As a result, down payment and borrower requirements are more relaxed. 

VA loans are only available to active service members, veterans or eligible surviving spouses. Issued by private lenders, these loans have no down payment minimum. While the VA doesn’t require a minimum credit score, lenders do. At Rocket Mortgage, the minimum credit score is 580.

Pros Of VA Mortgages

• There’s no minimum down payment.
• There are low credit requirements.
• The loan is backed by the VA.

Cons Of VA Mortgages

• They are restricted to only active service members, veterans or eligible surviving spouses.
• These loans require a VA funding fee to reduce the cost to taxpayers.
• You can't use a VA loan to buy an investment property or a second home.

When You Should Use This Loan To Buy A House

If you qualify, VA loans are a good option to consider no matter when you’re purchasing a new primary residence. However, in a competitive seller’s market, VA loans may make your offer on a home less attractive to sellers. This is because there is a perception that the home requirements of VA loans can sometimes delay closing.

USDA Loan

USDA loans are backed by the U.S. Department of Agriculture. Like FHA and VA loans, this means the USDA insures the loan against default. As a result, down payment and borrower requirements can be more relaxed. 

Designed to help people with low and moderate income, USDA loans are only available in certain areas of the country. Both the borrower and the property must meet specific requirements. For example, USDA loans follow HUD appraisal requirements. This can mean additional testing to ensure the home is safe.

Pros Of USDA Mortgages

• There is no minimum down payment required.
• There are often low credit requirements.
• The loan is backed by the USDA.

Cons Of USDA Mortgages

• USDA loans are restricted to only people who met certain low to moderate income requirements.
• Restricted to specific locations that are designated rural areas.
• There may be additional restrictions regarding appraisal.

When You Should Use This Loan To Buy A House

If you qualify, USDA loans are a great way to purchase property that you might otherwise not be able to afford.

Jumbo Loan

When your loan exceeds conforming loan limits, you’ll likely need a jumbo loan. The Federal Housing Finance Agency (FHFA) determines the conforming loan limit, which is $715,000 for 2023. The FHFA also sets a higher limit ($1,073,000 in 2023) for high-cost areas.

Jumbo loans are like other loans in that they can be a fixed-rate mortgage or an ARM. Borrower requirements are stricter than other loans, though. They also usually have higher interest rates. This is to mitigate the risk lenders incur by lending a larger-than-usual amount of money.

Pros Of Jumbo Mortgages

• You can buy a more expensive home.
• You can borrow more, meaning you don't have to deplete your savings.

Cons Of Jumbo Mortgages

• They come with higher interest rates.
• They’re harder to qualify for.

When You Should Use This Loan To Buy A House

Anytime you’re purchasing an expensive home it’s a good time to consider a jumbo loan. In fact, you may have no choice unless you’re paying cash.

30-Year Home Loan

A 30-year fixed-rate mortgage is the most popular mortgage in America. As the name suggests, this loan is paid off over 30 years. Paying your mortgage over such a long loan term means your monthly payments will be lower than with a shorter-term mortgage. The flip side is it will take 3 decades to finally pay off your home.

Pros Of 30-Year Mortgages

• You’ll have lower monthly payments.
• You can typically get approved for a larger amount compared to a shorter-term loan.

Cons Of 30-Year Mortgages

• You’ll pay more in interest.
• It takes a longer time to pay off your home.

When You Should Use This Loan Term To Buy A House

If you want a low monthly payment and don’t mind taking a long time to own your home free and clear, then a 30-year home loan might be a good option.

15-Year Home Loan

15-year mortgages last half the time of 30-year mortgages, which you probably figured out already. Since you have less time to pay off the loan, your monthly payments will be higher than a 30-year term. However, you’ll pay off your loan in half the time. You’ll also pay less overall because you’ll pay interest for just 15 years instead of 30.

Pros Of 15-Year Mortgages

• You will own your home sooner.
• You’ll save money on total interest paid.

Cons Of 15-Year Mortgages

• You’ll have a higher monthly payment.
• Higher monthly payments may mean you have less to spend or save.

When You Should Use This Loan Term To Buy A House

If you have the income to make higher monthly payments and you want to save money in the long run, a 15-year home loan may be the way to go.

The Bottom Line: The Best Home Loan Is The One That Works For You

Like houses, mortgages come in many shapes and sizes. Create a clear financial picture and plan before you decide which type of home loan is right for you. Do your research, shop around and never stop learning about the various types of loans available to you. Ready to get moving? You can start a mortgage application with Rocket Mortgage today!