Home Loan types and the Pros and Cons of Each

The single biggest hurdle when buying a home is squaring away financing. There is so much shit you have to do to be ready it can be overwhelming. There are several different types of loans that you can use to buy a home. Here’s a breakdown of the most common types of home loans used for buying homes and some of the pros and cons of each.

1. Conventional Loans:

Conventional loans are mortgages that aren’t insured or guaranteed by the government. These loans usually require a down payment of 3-5%, and the borrower’s credit score typically determines the interest rate. The pros of conventional loans is that the property can be in fixer upper condition and mortgage insurance can be eliminated once the borrower has paid 20% of the principal amount. The cons of conventional loans are that they require higher credit profile. You will need a credit score usually in the 700’s and a reasonable debt to income ratio (usually 36%-43%). As mentioned before you CAN do 3% down with a conventional loan, but you will pay a slightly higher interest rate as a result. Note: When I bought my house in Ohio in 2020, we used a Conventional Loan, since our appraisal had come back higher than our purchase price, we were able to refinance in a year and drop the mortgage insurance on the loan. This saved us over $100 per month on our payment.

2. FHA Loans:

FHA loans are backed by the Federal Housing Administration and are designed to help low- and moderate-income borrowers. These loans usually require a down payment of 3.5%, and the borrower’s credit score can be as low as 580 provided you have some money in the bank, reasonable debt to income ratio, good job history and no major collections. The pros of FHA loans include lower down payment requirements, a lower interest rate than most conventional products and more flexible credit and income requirements. The cons of FHA loans are that you keep mortgage insurance for the life of the loan, and FHA Loans have stigma because of the nit-picky bullshit that they flag in the appraisal process. FHA loans can be flagged for ‘No GFCI protection near water sources’ ‘Pealing paint on exterior of property’ ‘Hand rail missing from stairs’…..

3. VA Loans:

VA loans are available to eligible veterans and their spouses, and they are guaranteed by the Department of Veterans Affairs. These loans require no down payment (although you CAN put money down if you want to reduce your monthly payment), and the borrower’s credit score is not as significant a factor in determining eligibility. The pros of VA loans include no down payment requirements and no mortgage insurance premiums. The cons of VA loans are that they have limits on the loan amount, borrowers are subject to funding fees and VA Loans will be accepted if no better conventional offers are available for the seller because like FHA loans, VA loans can require dumb shit to be taken care of by the seller if an appraiser flags it int he appraisal. Ex: Basement gets a little damp, Pealing Paint on exterior of home, cracked window pane….

4. USDA Loans:

USDA loans are available to eligible borrowers in rural areas and are backed by the United States Department of Agriculture. Yes, because the government is directly involved this can slow shit down. In fact, I have heard of USDA Loan deals dying during the extended government shut down because the sellers didn’t want to wait three months to close….These loans also require no down payment, and the borrower’s credit score is less important than it is for a conventional loan. The pros of USDA loans include no down payment requirements, low-interest rates, and no mortgage insurance premiums. The cons of USDA loans are that they are only available to borrowers in rural areas, there are limits on the loan amount AND they require the home to be in good to excellent condition sorta like the FHA/VA shit I talked about above. Here is a link to the map of for determining USDA eligibility.

5. Jumbo Loans:

Jumbo loans are mortgages that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. (Currently $726,200) These loans usually require a down payment of at least 10%, and the borrower’s credit score is a significant factor in determining eligibility. I would say most of us don’t have to worry about this shit because we aren’t rich assholes, but some of you may just live in expensive ass cities, so this may be your only choice. The pros of jumbo loans include the ability to finance higher-priced homes and more flexible terms and conditions. The cons of jumbo loans are that they require higher down payments, higher interest rates, and more stringent credit and income requirements. Other than the loan limits it operates much like a conventional loan from an appraisal standpoint.

So the best way to look at the hierarchy of loan types when it comes to having your offer accepted (at least in Ohio where VA is not the primary loan type—it’s less than 1%) is 1.) Conventional/Jumbo 2.) VA 3.) FHA 4.) USDA

Rant about FHA Loans

Agents will straight up discriminate against your offer for having an FHA Loan Approval in much of the country. This is a bullshit stigma that needs to go away. I have had plenty of FHA Loans get through appraisal with little trouble when there were items needing taken care of that could be flagged by FHA. What needs to happen is guidelines for this loan type regarding the condition of a property need to change. The reason they have this extra guidelines is to mitigate risk. However, there is no goddamned additional risk of a house that has some pealing fucking paint. Jesus Christ.