4 Common Home Loan Types Every Buyer Should Understand

Whether you are buying your first home or moving into your second or third, understanding the basics makes the financing conversation a lot easier.

Each program has its own rules, benefits and tradeoffs, and lenders can have standards that are stricter than the program minimums.

That last sentence matters.

FHA loans, a popular option for first-time buyers

An FHA loan is insured by the Federal Housing Administration.

FHA does not lend the money directly. Approved lenders make the loan and FHA insurance protects the lender against certain losses.

FHA is not limited to first-time buyers, although it is popular with buyers who have a smaller down payment or credit history that does not fit a conventional loan as neatly.

Credit score

Under FHA program rules:

• A borrower with a qualifying credit score of 580 or higher may be eligible for the 3.5% minimum down-payment option.
• Scores from 500 through 579 generally require at least 10% down under FHA rules.

A lender can impose a higher minimum than FHA itself, so being inside the government guideline does not guarantee a particular lender will approve the loan.

Down payment

• 3.5% under the FHA rules for qualifying borrowers at 580 or higher
• 10% under the FHA rules for qualifying borrowers from 500 through 579

Debt-to-income ratio

You will often hear 43% quoted as though it is a hard FHA ceiling.

It is better thought of as a common benchmark.

Actual approval depends on the overall file, the lender and automated or manual underwriting. Some borrowers can be approved with higher ratios and some will not qualify even at a lower one.

The property also has to meet FHA requirements, and the home generally must be the borrower's primary residence.

Mortgage insurance

FHA loans require mortgage insurance.

That generally includes an upfront mortgage insurance premium and an annual premium that is normally collected through the monthly payment.

How long the annual mortgage insurance remains depends on the loan's original loan-to-value and the applicable FHA rules.

“The property also has to meet FHA requirements, and the home generally must be the borrower's primary residence.”

Conventional loans, the most common mortgage type

Conventional loans are not insured by FHA, VA or USDA.

Many conventional loans are underwritten to Fannie Mae or Freddie Mac standards.

Buyers with strong credit, stable income and a solid overall file can get very competitive conventional financing.

What lenders look for

Credit score: There is no longer one universal 620 minimum for every Fannie Mae Desktop Underwriter loan. Beginning with DU Version 12.0 in November 2025, Fannie Mae stopped applying a minimum credit-score requirement to loans submitted through DU and instead relies on the system's overall risk analysis.

That does not mean credit score stopped mattering.

Manual underwriting, other loan programs, individual lenders and investor rules can still have minimums or overlays. A score around 620 is still a number you will hear in the market, but it should not be presented as a universal Fannie Mae rule.

Down payment: Some eligible conventional buyers can purchase with as little as 3% down.

Debt-to-income ratio: There is no single number that fits every conventional approval. The automated underwriting system, loan program, credit profile, reserves and lender rules all matter.

Mortgage insurance

If your conventional mortgage requires private mortgage insurance, do not rely on the shortcut that it simply disappears the instant you "have 20% equity."

For many covered loans, federal law gives you the right to request PMI cancellation when the scheduled principal balance reaches 80% of the home's original value, assuming you meet the required conditions.

Automatic termination generally occurs when the scheduled balance reaches 78% of original value and the loan is current.

Fannie Mae, Freddie Mac and individual servicers can also have additional cancellation rules.

That is much more precise than saying "PMI comes off at 20%."

VA loans, benefits for veterans and military families

VA-backed purchase loans are available to eligible veterans, service members and certain surviving spouses.

For somebody who qualifies, the program can be extremely useful.

• No down payment may be required when the transaction meets VA requirements and the purchase price does not exceed the appraised value.
• No monthly PMI or FHA-style mortgage insurance premium.
• Competitive loan terms.
• A VA funding fee may apply. The amount varies by the transaction, down payment and prior use of the benefit.
• Some borrowers are exempt from the funding fee, including certain veterans receiving qualifying service-connected disability compensation and qualifying surviving spouses.

The borrower still has to qualify with a lender for income, credit and the overall loan.

VA backing is a benefit, not automatic mortgage approval.

“VA-backed purchase loans are available to eligible veterans, service members and certain surviving spouses.”

USDA loans, affordable options for rural areas

USDA's Single Family Housing Guaranteed Loan Program is designed for eligible buyers purchasing primary residences in qualifying rural areas.

For buyers who fit the program, the headline feature is hard to miss:

100% financing is available for qualifying borrowers.

Location

The property has to be inside a USDA-eligible area.

Eligibility is address specific.

Do not assume an address qualifies or does not qualify simply because somebody calls the town rural, suburban or part of Marysville.

Check the actual USDA eligibility map.

That matters around Arlington, Stanwood and rural areas north and east of Marysville because eligibility boundaries do not necessarily match the way people describe the community.

Income

USDA applies household-income limits that vary by location and household circumstances.

Credit

USDA itself currently states that the Guaranteed Loan Program has no set minimum credit score.

The applicant still has to demonstrate the ability and willingness to repay debt, and a lender or investor can impose its own credit standards.

So "USDA requires a 640" is not accurate.

Some lenders may use 640 as part of their own underwriting process, but that is different from a USDA program minimum.

Down payment and fees

Qualified buyers can obtain 100% financing.

USDA guaranteed loans also carry an upfront guarantee fee and an annual fee that is typically paid through the monthly payment.

The home must be used as the buyer's primary residence.

“One of the best things you can do before starting the serious part of your search is talk with a lender who actually works with more than one of these loan programs.”

Thinking about buying?

One of the best things you can do before starting the serious part of your search is talk with a lender who actually works with more than one of these loan programs.

The cheapest-looking loan on a comparison chart is not necessarily the best loan for your file.

Your credit, cash, monthly payment, property type and how long you expect to own the house all matter.

Get the numbers for your situation.

Then go shopping.

Sources: U.S. Department of Housing and Urban Development/FHA; Fannie Mae Selling Guide and DU Version 12.0 updates; Consumer Financial Protection Bureau PMI guidance; U.S. Department of Veterans Affairs; USDA Rural Development Single Family Housing Guaranteed Loan Program. Loan approval and lender overlays vary. This is general information, not lending or financial advice.