Understanding the Different Types of Home Financing Options when Buying a Home

There is a lot to know when it comes to financing a home purchase. Not only are there different types of financing, but within each category there are subtypes, and to make things more complicated, each lender can have their own unique requirements on top of that!

So, let’s break this down into some simple, digestible chunks.

Government-Backed vs. Non-Government-Backed Loans

At the highest level, financing options can be grouped into two big categories:

1. Government-backed loans

2. Non-government-backed loans (also known as conventional loans)

Let’s start with the government-backed options.

Why Do Government-Backed Loans Exist?

After the housing market crash of 2008, the government created programs to help stabilize lending and reduce risk to banks. These programs work by offering insurance to lenders: if a borrower defaults on a loan, the government will cover the bank’s losses, but only if the bank followed specific guidelines when issuing the loan.

These guidelines can be strict, because the government is trying to minimize the chances of having to pay out on those defaults. In return, though, these programs opened the door to homeownership for more Americans by reducing down payment requirements and loosening credit restrictions.

Interestingly, this has had a ripple effect on the entire lending world, conventional lenders have had to lower their own down payment requirements just to stay competitive. That’s why today, it’s not uncommon to see both FHA and conventional loans requiring as little as 3–3.5% down.

FHA Loans: The Most Common Government-Backed Loan

FHA loans are backed by the Federal Housing Administration. These loans are widely available and make up about 20% of the loans in our local real estate market here in Northeast Texas.

To qualify for an FHA loan, you’ll need:

• A minimum credit score (usually 580 or higher for the 3.5% down option)

• A steady job or income

• A debt-to-income ratio below a certain threshold (typically under 43%)

One important thing to know: FHA loans have stricter requirements on the condition of the property. FHA appraisals include a safety and habitability check. If a home doesn’t meet these standards, peeling paint, exposed wires, broken windows, roofing issues, the seller would need to repair those issues before the buyer can close the loan.

That’s one reason some sellers may hesitate to accept FHA offers.

VA Loans: For Those Who Have Served

VA loans are backed by the U.S. Department of Veterans Affairs and are exclusively available to active-duty service members, veterans, and eligible surviving spouses.

VA loans are incredibly powerful. They:

• Require 0% down

• Have no private mortgage insurance (PMI)

• Typically offer better interest rates than FHA or conventional loans

An added benefit? VA loans can sometimes be assumed by another eligible VA buyer. That means if a veteran is selling their home with a low interest rate loan, another veteran may be able to “assume” that loan, keeping the original low interest rate and just paying the difference in sales price upfront.

VA loans make up about 12% of our local real estate market, and they’re a great benefit for those who qualify.

USDA Loans: Rural Housing Assistance

There’s one more lesser-known government-backed option: the USDA loan. These are backed by the U.S. Department of Agriculture and are designed to encourage homeownership in rural and suburban areas.

USDA loans:

• Offer 100% financing (no down payment)

• Have income limits (usually under 115% of the median income for the area)

• Require the home to be in a USDA-eligible area (much of Lamar and Red River County qualifies)

These loans are perfect for lower-income buyers looking to live outside major cities.

Conventional Loans: Non-Government, More Flexible Homes

Conventional loans are not backed by the government. That means the lender is taking on more risk, and because of that, they tend to have:

• Higher credit score requirements (usually 620 or higher, ideally 680+)

• Slightly higher down payment requirements (typically 5% to 20%)

Conventional loans make up about 37% of our local real estate market and are the go-to for many homebuyers who want more flexibility in the type of property they buy.

One big advantage: conventional loans don’t have the same strict property condition requirements that FHA or VA loans do. This makes them perfect for older homes, fixer-uppers, or anything that might not pass an FHA safety inspection.

Loan Terms and Interest Rates

Regardless of loan type, you’ll usually have options for:

• Loan term (typically 15, 20, or 30 years)

• Interest rate type (fixed vs. adjustable)

A 15-year loan will have higher monthly payments, but you’ll pay significantly less in interest over the life of the loan.

A 30-year loan spreads the payments out and lowers your monthly cost, but you’ll pay more in interest in the long run.

As for interest rate types:

• Fixed-rate loans have the same rate for the entire term, stable and predictable.

• Adjustable-rate mortgages (ARMs) start with a lower interest rate for the first few years, but the rate can go up (or down) later based on real estate market trends.

FHA vs. Conventional: Which Should You Choose?

A lot of buyers qualify for both FHA and conventional loans, so the question becomes: which one is better for you?

Here are a few things to consider:

• Your credit score: If your score is under 680, FHA might offer better terms.

• Your down payment: If you’re working with a small down payment, FHA can be more flexible.

• The property itself: If the home needs work, a conventional loan might be the only option.

• How your offer looks to sellers: Sellers often prefer conventional loans. FHA loans require an additional property inspection, and any repairs required by the FHA must be fixed before closing, which could cost the seller time and money.

This last point is especially important in competitive real estate markets. When a seller has multiple offers, they’ll likely favor a conventional offer over an FHA one, even if the offer price is the same, because it poses less risk and less hassle for them.

So, What Do You Qualify For?

That’s the big question. Your credit score, income, job history, savings, and even the location of the home all factor into what loan options are available to you.

But once you get pre-approved, your lender can help you explore the pros and cons of each option. From there, it’s about matching your financial situation with your homeownership goals.

Some buyers are looking for the lowest monthly payment. Some want to pay off their home quickly. Others are looking for flexibility or long-term investment value. There’s no one-size-fits-all loan, but there is one that fits your needs best.

Bottom Line?

Financing a home doesn’t have to be overwhelming if you break it down into these main parts:

• Government-backed vs. conventional

• Loan term and interest rate

• Home requirements and seller considerations

A good lender and a knowledgeable realtor (hi, that's me!) will help you make the right choice every step of the way.

If you’re thinking about buying a home and have questions about financing, give me a call. I am not a lender, but I want to educate buyers with the knowledge I have from working in real estate for over 20 years, and I can connect you with lenders who’ll explain your options and help you take the next step.

Leah Rolen, Realtor®
Keller Williams
📞 469-744-5309