A home loan is a legal agreement with a lender or financial institution, that you would be paying the loan amount in monthly installments over a period of time. Home loans are secured loans because banks take property as collateral against the loan amount. The loan repayment is usually done over a period of 10 to 25 years, depending on the eligibility. Choosing between different types of loans can be a difficult task for many. This is why we have listed some types of home loans along with their pros and cons to help you make an informed decision.

Conventional mortgage
This is a traditional type of home loan insured by the federal government. It is considered a good option, especially if you are a first-time buyer because it allows you to opt for low down payment. However, it is important to note that people paying less than 20% in down payment are required to buy private mortgage insurance to protect the lenders against any eventualities. Here are some of the pros and cons of this type of mortgage:

Pros

• These loans end up being cheaper in the long run, even though they have a higher rate of interest. They are also more flexible, in the sense that you can choose the tenure and the down payment that can be as low as 3%.
• Relatively lesser paperwork is required to get this loan.
• If you do not qualify for government-insured loans, then a conventional mortgage is for you.

Cons

• You need to have a credit score of above 620 to apply for the loan. It is also difficult to get a low-interest rate on the loan.
• They have strict qualification guidelines, such as the debt-to-income ratio should be less than 45%.
• Due to higher potential risk, the time taken to approve your loan may be longer because the lenders look at your financial history closely before dispensing the amount.

Jumbo mortgage
This type of loans are designed to finance luxury properties as the loan amount is determined on a case-to-case basis. It gives you access to additional funds that you require to pay for your dream home. You can opt for this loan if the financing exceeds the limits set by the FHFA (Federal Housing Finance Agency).

Pros

• Borrowers are able to take loans up to any amount that they need and buy a property. You can do all of this without ever being concerned about your savings. This is an attractive proposition for most prospective buyers.
• You can choose from a wide range of loan programs. For example, you can get a fixed-rate loan for 30 years or opt for an adjustable rate of interest.

Cons

• You need to have a credit score of over 700 to qualify for this type of loan.
• You must also show high-income proof in terms of cash and savings.
• It is difficult to be approved for this loan because the credit requirements are more stringent than the others.

Government insured loans
This type of loan facility helps people to buy homes with three mortgage plans – Federal Housing Agency (FHA), the US Department of Agriculture (USDA), and the US Department of Veterans Affairs (VA Loans).

USDA loans are for low-income group people who are planning to buy a home in rural areas. They can apply for this loan if it falls under USDA eligibility guidelines.

VA loans are designed specifically for members of the US military, both active and veterans. Banks don’t require borrowers to pay any down payment or PMI (private mortgage insurance). Here are some pros and cons of government-insured loans:

Pros

• If you are someone struggling to get conventional loans, these loans are the perfect option for you. It is much easier to qualify for them, making homeownership accessible to you, even if you have a low credit score or financial limitations.
• The down payment requirement is also low in these loans. For example, FHA needs a minimum of 3.5% as a down payment, but VA and USDA loans do not have any down payment requirements.
• You don’t need to have a perfect credit score to qualify for these loans. For instance, VA and FHA loans can be secured with a credit score as low as 580.

Cons

• If you are opting for an FHA or a VA loan, you will be required to move within the first two months of closing the loan. This type of loan also requires you to keep the property as your primary residence for a full year to fulfill the “owner-occupancy” rule.
• You may have to meet certain requirements to qualify for these loans. For example, VA loan is only available to active military personnel or a veteran of the armed forces.