Understanding the Most Common Home Loan Options

Graphic with three small house models in brown and white colors on a surface against a blue background. Above them is a maroon banner with the First Pioneers Federal Credit Union logo and the text 'Understanding the Most Common Home Loan Options.

Owning a home is a huge milestone for anyone. It's that feeling of having your own space, making memories with family, and building something that's truly yours. There are so many things to consider when buying a home, and figuring out home loans can be one of the most confusing parts.

We talk to our members every day who are trying to understand all the mortgage options out there. With so many choices and technical terms, it's easy to feel lost. So we wanted to break down some of the most common types of home loans our members in Acadiana should know about.

Conventional Loans

These are the most common types of mortgages you'll come across. They aren't backed by the federal government and are offered by private lenders such as traditional banks and credit unions. Conventional loans come in two types:

  • Conforming loans: These loans conform to the standards set by the Federal Housing Finance Agency (FHFA), which means they're eligible to be purchased by Fannie Mae and Freddie Mac.

  • Non-conforming loans: As the name suggests, these loans don't meet one or more of the FHFA standards, so they can't be purchased by the two enterprises above. That makes them a bit riskier for lenders.

Pros of Conventional Loans

  • Down payment can be as low as 3% for qualifying loans

  • They're available from the majority of lenders, so you have options

  • You can use them for a variety of purchases, from your primary residence to investment properties

Cons of Conventional Loans

  • If your down payment is less than 20%, you'll need private mortgage insurance (PMI), which bumps up your monthly costs

  • You typically need a credit score of at least 620 and a debt-to-income ratio below 50% to qualify

Fixed-Rate Mortgages

With a fixed-rate mortgage, your interest rate and principal payment stay the same for the life of the loan, usually 15 or 30 years. That means your monthly payment stays predictable, which is great for budgeting. These loans are ideal if you plan to stay in your home long-term.

Pros of Fixed-Rate Mortgages

  • You'll know exactly what your payment will be each month, so no surprises!

  • If you lock in a low interest rate, you get to keep it, even if market rates go up

Cons of Fixed-Rate Mortgages

  • If your interest rate starts out high, you'll have to refinance to get a lower one later.

  • In the early years of the loan, more of your payment goes toward interest than principal.

Government-Backed Loans

These are loans insured by various federal agencies, which often makes them more accessible for certain borrowers. There are three main types of government-backed loans, and each one is designed for different groups of people with different needs.

FHA Loans

These are insured by the Federal Housing Administration and are popular with first-time home buyers.

Pros of FHA Loans

  • Low down payment requirements

  • Lower credit score requirements and more flexible debt-to-income ratios

  • No income limits, so you can qualify regardless of how much you make

Cons of FHA Loans

  • Mortgage insurance premiums are required and usually last for the life of the loan

  • Lower loan limits compared to conventional loans

  • Can only be used for a primary residence, not investment properties

USDA Loans

These are backed by the U.S. Department of Agriculture and are aimed at low-income borrowers purchasing a primary home in eligible rural areas.

Pros of USDA Loans

  • No down payment required

  • Available to low-income borrowers, even with low credit scores

Cons of USDA Loans

  • Only available in certain rural and suburban areas

  • Can only be used for your primary home

  • They charge guarantee fees upfront and annually

VA Loans

These are for eligible members of the U.S. military, including active duty, veterans, as well as surviving spouses. They're backed by the Department of Veterans Affairs.

Pros of VA Loans

  • Competitive interest rates compared to other loan types

  • No income or loan limits

  • In most cases, they don't require a down payment, minimum credit score, or mortgage insurance

Cons of VA Loans

  • You'll need to pay a VA funding fee at closing

  • You need to meet specific requirements to qualify

  • Like the other government loans, they can only be used for your primary home

Second Mortgages: Home Equity Loans and HELOCs

Once you've been in your home for a while and paid down some of your mortgage, you start building what's called equity.

Equity is the difference between what your home is worth and what you still owe on it. Second mortgages let you borrow against that equity, essentially using your house as collateral for additional financing.

  • A home equity loan gives you a lump-sum amount that comes with a fixed interest rate and is repaid in fixed installments over a set term.

  • A HELOC (Home Equity Line of Credit) is a revolving credit line with a variable rate that works similar to a credit card.

Pros of Second Mortgages

  • They can be used to purchase or refinance a home

  • You can also use the money as you see fit, such as home improvements, debt consolidation, education costs, and more.

Cons of Second Mortgages

  • Interest rates and qualification requirements are often stricter than with first mortgages

  • Missing payments could lead to foreclosure, since your home is the collateral

Finding What Works for You

The loan types we've covered are just some of the options out there. Everyone's financial situation is different, and what works great for your neighbor might not be the right fit for you.

At First Pioneers, we don't just help our members in Acadiana get home loans with great interest rates. Our team also takes the time to educate you on your options and help you understand what makes the most sense for your specific situation.

If you're thinking about buying a home or refinancing, get in touch with our home loan specialists in Lafayette or New Iberia today. We’ll guide you through the process and help you find a home loan that fits your needs.

Dian Puspasari