The home-buying tradition is alive and well in modern America. Just in 2022, Americans purchased over 5 million existing homes.

Of course, that raw number glosses over some important details. For the buyers, one of the most important details is their financing options. After all, most people pay cash when they buy a home.

Instead, they get a loan from a bank or other lender. The question that buyers must answer is which of the several available types of home loans they’ll choose.

If you’re not up to speed on the financing options for home purchases, keep reading for an overview of the types of loans buyers pick.

Home Mortgages

The most common option that prospective home buyers go with is the traditional home mortgage. These are essentially long-term loans that you typically pay over 15, 20, or 30 years.

Qualifying for a traditional mortgage isn’t always easy for potential home buyers. Most lenders impose a number of minimum requirements before they’ll even consider you for this kind of mortgage.

You usually need a minimum credit score of around 620. However, the closer your credit score is to 620, the higher your overall interest rate.

Most lenders also require a down payment from you. The normal expectation is that you’ll put down 20 percent of the final negotiated price for the home.

This is where choosing a lender can make a difference. Depending on the lender, some will let you put down less than 20 percent. Some will let you put down as little as 3 percent.

The catch with offering a lower down payment is that you must typically buy private mortgage insurance or PMI. Private mortgage insurance gives the lender financial coverage if you stop paying your mortgage.

Mortgages come in a few different types that we’ll look at next.

Fixed-Rate Mortgages

Many buyers prefer fixed-rate mortgages. With this type of mortgage, you lock in an interest rate when you get the mortgage. This keeps your monthly payments on the loan very stable over the life of the loan.

This kind of loan makes the most sense when the interest rates on mortgages are low. However, interest rates can vary depending on where you live.

If you live in a major city, such as New York City, the interest rates are often higher than the national average. If you live in rural Indiana, you may well see interest rates that hover at or even slightly below the national average.

Adjustable Rate Mortgages

The other main option is the adjustable rate mortgage. With this kind of mortgage, your interest rate changes based on how the market changes over time.

These mortgages usually set a fixed interest rate for a period of time at the beginning of the loan. For example, you might pay 6 percent interest for the first five years or seven years.

Once you leave that intro rate period, the lender adjusts your rate. Many buyers dislike these kinds of loans because it makes their payments less predictable.

There are, however, safeguards against lenders dramatically increasing your interest rate. These loans almost always include a hard rate cap. Once you reach that cap, the lender cannot increase the interest rate any higher.

Government-Backed Loans

Most buyers get loans that are backed by a bank, but that’s not the only option. You can also explore government-backed loan options as well.

While you still get these loans through a bank, the government assumes the risks of the loans instead of the bank itself.

FHA

The Federal Housing Administration offers loans designed to help those with lower credit scores achieve home ownership. Depending on the down payment you put down, you can get a loan with a credit score as low as 500.

With that score, you must typically put down a 10 percent down payment. For those with a credit score at or above 580, you often reduce that down payment to as little as 3.5 percent.

USDA

The US Department of Agriculture also offers loans designed to help low-income individuals secure housing. On the upside, USDA loans often require no down payment.

These loans do come with a stipulation, though. You can only buy homes in rural or, sometimes, suburban areas. While that works out great for people who want to live in the country, it’s a non-starter if you want a house in a city.

VA

For some, the Department of Veteran Affairs can also serve as a source for funding your home purchase. VA loans often offer very good interest rates and may require no down payment. The catch is that these loans are reserved for veterans, those on active duty, and their spouses.

Government-backed loans can offer you a way to buy a home if you cannot secure other financing options. You may also enjoy lower interest rates and even get to take a pass on a down payment.

The catch is that you must meet their borrowing requirements.

Other Options

While the types of loans listed above represent the vast majority of home loans, they aren’t the only choices. Other options include:

Much like government loans, these loans can come with specific requirements. For example, you may face shorter payback periods or higher-than-average interest rates.

Make sure you fully understand the requirements when you take one of these options.

Picking between Types of Home Loans

Picking between types of home loans can prove a challenging task. Even if you go with a traditional mortgage, you must decide if you’ll go with a fixed-rate or variable-rate loan.

If a traditional mortgage just isn’t in the cards for you, there are potentially government-backed loans from the FHA, USDA, or VA. Of course, you must meet their lending requirements.

There are also less traditional loan options. Just make sure you understand the details of those options.

Looking for more home-buying tips? Check out the posts in our Real Estate section.