The type of mortgage you choose can determine how much house you can afford, the rate you get, closing costs, and how much mortgage insurance you may need. Each loan option is catered to a specific audience, and those on the edges can choose wisely
Conventional loan: is the most common and has to follow Fannie Mae or Freddie Mac guidelines. You'll need at least 3% down and a credit score above 620. You'll pay PMI or private mortgage insurance if you put less than 20 down. Since the avg. homebuyer only puts 9% down; PMI is important but can be as low as 0.1% or $40/m on a $500K loan for homebuyers with excellent credit. The conventional loan limit changes every year to keep up with inflation and is $726,200 in 2023.
Jumbo loan: allow for loan sizes larger than $726,200. In most cases, you'll need at least 10.01% down and a higher credit score of 680. With housing affordability becoming a rising concern, more first-time homebuyers may need Jumbo mortgages. The govt. outlines certain ZIP codes in high-cost states, HI, NY, CA, and DC where conventional loan limits are 150% higher. In these areas, Jumbo loans are larger than $1,089,300. Jumbo loans are not backed by Fannie Mae or Freddie Mac and do not require PMI!
FHA loans: are backed by the Federal Housing Administration and can accommodate credit as low as 580 with 3.5% down and 500 with 10% down. They come with an upfront mortgage insurance premium of 1.75% to insure lenders against default and are therefore able to offer low rates. They are a great option for first-time homebuyers and allow for up to 6% back in seller contributions. The FHA loan limit is $472,030 in most areas and goes up to $1,089,300 in high-cost areas. See the limit in your county The major downside is MIP or mortgage insurance premium that is deleted after 11yrs for loans with 10% down. If you put less than 3.5% down, MIP lasts until your refinance. The FHA dropped its mortgage insurance premium. in 2023 by 0.3% or $100/m on a $400K loan.
VA loans: are available to more than 2M American service members or their surviving spouses. These loans require 0% down, have flexible credit minimums, and recently dropped their funding fee by 15bps. Veterans receiving disability get additional benefits
Funding fee waiver
Income mark-up because disability is non-taxable
Increased homestead exemption which also increases buying power
USDA loans: are backed by the U.S. Department of Agriculture to buy property in a qualifying rural or suburban area. You must meet low-to-moderate income thresholds and do not strictly require a down payment.
FHA, VA, and USDA are all govt. backed loans. Conventional loans are backed by Fannie Mae and Freddie Mac, to giants of the housing industry that make mortgages possible. Jumbo loans are privately backed and therefore have the most strict requirements from investors.