Understanding Your Mortgage Options as a New Homeowner

# Understanding Your Mortgage Options as a New Homeowner Choosing the right mortgage is one of the most important financial decisions you'll make as a new homeowner. With so many loan options available—conventional, FHA, VA, USDA, and NON-QM—it can be overwhelming to determine which one is best for your situation. This comprehensive guide breaks down all major mortgage types, compares their requirements and benefits, and helps you make an informed decision based on your income type, credit score, down payment, and long-term goals. --- ## Overview: Types of Mortgages Available ### 1. **Conventional Loans** Conventional loans are mortgages **not** backed by the federal government. They're offered by private lenders and conform to guidelines set by Fannie Mae and Freddie Mac. **Best for:** Borrowers with strong credit, stable W-2 income, and at least 3-5% down payment. ### 2. **FHA Loans** FHA (Federal Housing Administration) loans are government-backed mortgages designed for first-time homebuyers and borrowers with lower credit scores. **Best for:** Borrowers with credit scores as low as 580 and only 3.5% down payment. ### 3. **VA Loans** VA (Veterans Affairs) loans are government-backed mortgages available to active-duty military, veterans, and eligible spouses. **Best for:** Veterans and military members who want 0% down payment and no PMI. ### 4. **USDA Loans** USDA (U.S. Department of Agriculture) loans are government-backed mortgages for rural and suburban homebuyers. **Best for:** Low-to-moderate income buyers in eligible rural areas who want 0% down. ### 5. **NON-QM Loans** NON-QM (Non-Qualified Mortgage) loans are alternative financing options for borrowers who don't meet conventional lending guidelines. **Best for:** Self-employed, gig workers, foreign nationals, recent credit challenges, high-net-worth individuals with assets. --- ## Side-by-Side Comparison: All Mortgage Types | Feature | Conventional | FHA | VA | USDA | NON-QM | |---------|-------------|-----|----|----- |--------| | **Min. Credit Score** | 620-640 | 580 | No minimum | 640 | 580-620 | | **Min. Down Payment** | 3-5% | 3.5% | 0% | 0% | 10-40% | | **PMI Required?** | Yes (if <20% down) | Yes (MIP) | No | Yes (guarantee fee) | No | | **Income Verification** | W-2, pay stubs, tax returns | W-2, pay stubs, tax returns | W-2, pay stubs, tax returns | W-2, pay stubs, tax returns | Bank statements, 1099s, assets | | **Max DTI Ratio** | 43% | 43-50% | 41% | 41% | 50% | | **Property Types** | Primary, second home, investment | Primary only | Primary only | Primary only | Primary, second home, investment | | **Loan Limits** | $766,550 (2024) | $498,257 (2024) | $766,550 (2024) | $420,680 (2024) | Up to $3M+ | | **Interest Rates** | Lowest | Slightly higher | Lowest | Low | 0.5-2% higher | | **Best For** | Strong credit, W-2 income | Low credit, small down payment | Veterans, military | Rural buyers | Self-employed, non-traditional income | --- ## Conventional Loans: The Traditional Choice ### What Are Conventional Loans? Conventional loans are the most common type of mortgage. They're not backed by the government and must meet Fannie Mae and Freddie Mac guidelines. ### Requirements - **Credit Score:** 620 minimum (640+ recommended) - **Down Payment:** 3% minimum (5% for investment properties) - **DTI Ratio:** Up to 43% (sometimes 45% with compensating factors) - **Income:** W-2 employment with 2+ years history - **Documentation:** Pay stubs, W-2s, tax returns (2 years) - **Reserves:** 2-6 months recommended ### Pros ✅ **Lower interest rates** than government-backed loans ✅ **No upfront mortgage insurance premium** ✅ **PMI can be removed** once you reach 20% equity ✅ **Higher loan limits** ($766,550 in most areas) ✅ **Can be used for primary, second home, or investment property** ### Cons ❌ **Strict income documentation** (W-2s and tax returns required) ❌ **Higher credit score requirements** than FHA ❌ **PMI required** if down payment is less than 20% ❌ **Difficult for self-employed** borrowers with write-offs ### Who Should Choose Conventional? - W-2 employees with 2+ years stable employment - Credit score 640+ - Can afford 5-20% down payment - Want the lowest interest rates - Plan to remove PMI after reaching 20% equity --- ## FHA Loans: First-Time Buyer Favorite ### What Are FHA Loans? FHA loans are insured by the Federal Housing Administration, making them less risky for lenders. This allows for lower credit scores and down payments. ### Requirements - **Credit Score:** 580 minimum (500-579 with 10% down) - **Down Payment:** 3.5% minimum (10% if credit score 500-579) - **DTI Ratio:** Up to 43% (sometimes 50% with compensating factors) - **Income:** W-2 or self-employed with 2 years tax returns - **Documentation:** Pay stubs, W-2s, tax returns (2 years) - **Reserves:** Not required but recommended ### Pros ✅ **Low credit score requirements** (580 minimum) ✅ **Low down payment** (3.5%) ✅ **Easier to qualify** than conventional ✅ **Accepts gift funds** for down payment ✅ **Flexible DTI ratios** (up to 50%) ### Cons ❌ **Upfront mortgage insurance premium** (1.75% of loan amount) ❌ **Monthly mortgage insurance** (MIP) for life of loan if down payment <10% ❌ **Lower loan limits** than conventional ($498,257 in most areas) ❌ **Primary residence only** (no investment properties) ❌ **Property must meet FHA standards** (can limit older homes) ### Who Should Choose FHA? - First-time homebuyers with limited savings - Credit score 580-640 - Only 3.5% down payment available - W-2 or self-employed with 2 years tax returns - Buying a primary residence only --- ## VA Loans: Benefits for Veterans ### What Are VA Loans? VA loans are guaranteed by the Department of Veterans Affairs and available to active-duty military, veterans, and eligible spouses. ### Requirements - **Credit Score:** No official minimum (most lenders require 620+) - **Down Payment:** 0% (no down payment required!) - **DTI Ratio:** Up to 41% (sometimes higher with compensating factors) - **Income:** W-2 or self-employed with 2 years tax returns - **Documentation:** Pay stubs, W-2s, tax returns, Certificate of Eligibility - **Reserves:** Not required ### Pros ✅ **0% down payment** required ✅ **No PMI** (no monthly mortgage insurance) ✅ **Competitive interest rates** ✅ **No prepayment penalties** ✅ **Easier to qualify** than conventional ✅ **Can be used multiple times** ### Cons ❌ **VA funding fee** (2.3% for first-time use, 3.6% for subsequent use) ❌ **Only for eligible veterans and military** ❌ **Primary residence only** (can't use for investment properties) ❌ **Property must meet VA standards** ❌ **Seller may resist** due to strict appraisal requirements ### Who Should Choose VA? - Active-duty military, veterans, or eligible spouses - Want 0% down payment - Want to avoid PMI - Buying a primary residence - Have Certificate of Eligibility --- ## USDA Loans: Rural Homebuying ### What Are USDA Loans? USDA loans are backed by the U.S. Department of Agriculture and designed for low-to-moderate income buyers in eligible rural and suburban areas. ### Requirements - **Credit Score:** 640 minimum - **Down Payment:** 0% (no down payment required!) - **DTI Ratio:** Up to 41% - **Income:** Must not exceed 115% of area median income - **Documentation:** Pay stubs, W-2s, tax returns - **Location:** Property must be in USDA-eligible area ### Pros ✅ **0% down payment** required ✅ **Low interest rates** ✅ **Flexible credit requirements** ✅ **Low mortgage insurance** (0.35% annual fee) ### Cons ❌ **Income limits** apply ❌ **Geographic restrictions** (rural areas only) ❌ **Primary residence only** ❌ **Upfront guarantee fee** (1% of loan amount) ❌ **Longer processing times** ### Who Should Choose USDA? - Low-to-moderate income buyers - Buying in eligible rural or suburban areas - Want 0% down payment - Meet income limits for the area - Buying a primary residence --- ## NON-QM Loans: Alternative Financing ### What Are NON-QM Loans? NON-QM loans are flexible mortgage products for borrowers who don't meet conventional lending guidelines. They use alternative income documentation. ### Common NON-QM Programs 1. **Bank Statement Loans** - Qualify using 12-24 months of bank deposits 2. **1099 Income Loans** - Qualify using 1099 forms for gig workers 3. **Asset Depletion Loans** - Qualify using liquid assets (retirees) 4. **Foreign National Loans** - No SSN required (use passport/ITIN) 5. **DSCR Loans** - Qualify based on rental income (investors) ### Requirements - **Credit Score:** 580-640 (varies by program) - **Down Payment:** 10-40% (varies by program) - **DTI Ratio:** Up to 50% - **Income:** Bank statements, 1099s, assets, foreign income - **Documentation:** Alternative docs (no tax returns required for most programs) - **Reserves:** 6-24 months ### Pros ✅ **No tax returns required** (most programs) ✅ **Flexible income verification** (bank statements, 1099s, assets) ✅ **Self-employed friendly** ✅ **Accepts foreign nationals** ✅ **Faster approval after credit events** (12-24 months vs 2-7 years) ✅ **Higher loan amounts** (up to $3M+) ✅ **All property types** (primary, second home, investment) ### Cons ❌ **Higher interest rates** (0.5-2% above conventional) ❌ **Larger down payments** (10-40%) ❌ **Higher reserves required** (6-24 months) ❌ **Not all lenders offer NON-QM** ### Who Should Choose NON-QM? - Self-employed with business write-offs - Gig workers (Uber, freelance, consulting) - Foreign nationals (H-1B, L-1, E-2 visas) - Early retirees with substantial assets - Recent credit challenges (bankruptcy, foreclosure) - Real estate investors - High-net-worth individuals **Learn more:** [First-Time Homebuyer's Guide to NON-QM Loans](/blog/first-time-homebuyer-guide-non-qm-loans) --- ## Decision Framework: Which Loan Is Right for You? Use this decision tree to determine your best mortgage option: ### Start Here: What's Your Employment Status? #### **W-2 Employee (Traditional Employment)** **Credit Score 580-640?** → **FHA Loan** (3.5% down, easier approval) **Credit Score 640+?** → **Conventional Loan** (lower rates, PMI removable) **Military/Veteran?** → **VA Loan** (0% down, no PMI) **Rural Area + Income Limits Met?** → **USDA Loan** (0% down, low rates) --- #### **Self-Employed / Business Owner** **Can show 2 years tax returns with strong income?** → **Conventional or FHA Loan** **Tax returns show low income due to write-offs?** → **Bank Statement Loan** (use deposits, not tax returns) **Business less than 2 years old?** → **Bank Statement Loan** (12 months minimum) --- #### **Gig Worker / 1099 Contractor** **Multiple 1099 income sources?** → **1099 Income Loan** (combine all sources) **Fluctuating income month-to-month?** → **Bank Statement Loan** (averages deposits) --- #### **Retired / High-Net-Worth** **Substantial liquid assets ($500K+)?** → **Asset Depletion Loan** (no income required) **Pension or Social Security income?** → **Conventional or FHA Loan** --- #### **Foreign National** **H-1B, L-1, E-2, or O-1 Visa?** → **Foreign National Loan** (25-30% down) **No U.S. visa (living abroad)?** → **Foreign National Loan** (30-40% down, investment property) --- #### **Recent Credit Challenges** **Bankruptcy/Foreclosure 12-24 months ago?** → **NON-QM Loan** (faster approval) **Bankruptcy/Foreclosure 2-7+ years ago?** → **FHA or Conventional Loan** --- ## Frequently Asked Questions ### Can I switch loan types after pre-approval? Yes! You can change loan types during the application process if your situation changes or if you find a better option. However, this may require new documentation and could delay closing. ### Can I combine loan types? No, you cannot combine different loan types for a single property. However, you can use different loan types for different properties (e.g., conventional for primary residence, DSCR for investment property). ### Which loan type has the lowest interest rate? **VA loans** typically have the lowest rates, followed by **conventional loans**, then **FHA**, **USDA**, and **NON-QM loans** (in that order). ### Can I refinance from one loan type to another? Absolutely! Many borrowers use FHA or NON-QM loans initially, then refinance to conventional loans after: - Building equity (20%+) - Improving credit score - Establishing 2 years of tax returns (for NON-QM borrowers) ### Do all lenders offer all loan types? No. Most lenders offer conventional, FHA, and VA loans. Fewer lenders offer USDA and NON-QM loans. **NS Funding specializes in NON-QM loans** for borrowers with non-traditional income. ### What if I don't fit any of these categories? If you have unique circumstances (complex income, international assets, trust funds, legal settlements), contact a NON-QM specialist. There are specialized programs for nearly every situation. ### How do I know if I'm getting the best rate? Shop around! Get quotes from at least 3 lenders and compare: - Interest rate - APR (includes fees) - Closing costs - Loan terms - Lender reputation ### Can I use gift funds for my down payment? - **Conventional:** Yes, up to 100% of down payment if >20% down - **FHA:** Yes, up to 100% of down payment - **VA:** Yes, but not required since 0% down - **USDA:** Yes, with restrictions - **NON-QM:** Varies by program (most allow gift funds) ### What's the difference between pre-qualification and pre-approval? - **Pre-qualification:** Informal estimate based on self-reported information (no credit check) - **Pre-approval:** Formal approval based on verified documentation and credit check (carries more weight with sellers) Always get **pre-approved** before house hunting! ### How long does each loan type take to close? - **Conventional:** 30-45 days - **FHA:** 30-45 days - **VA:** 40-50 days (VA appraisal can take longer) - **USDA:** 45-60 days (government processing) - **NON-QM:** 30-45 days --- ## Next Steps: Choose Your Path ### 1. **Determine Your Best Loan Type** Use the decision framework above to identify which loan type fits your: - Employment status - Credit score - Down payment amount - Income documentation ability - Property type ### 2. **Get Pre-Qualified** Contact lenders who specialize in your loan type: **For NON-QM Loans (self-employed, gig workers, foreign nationals):** - **NS Funding:** (800) 917-1595 - [Apply Online](/apply) **For Conventional/FHA/VA Loans:** - Shop at least 3 lenders for best rates ### 3. **Gather Documentation** Start collecting required documents: - **All loan types:** ID, credit authorization, down payment verification - **Conventional/FHA/VA:** Pay stubs, W-2s, tax returns (2 years) - **NON-QM:** Bank statements, 1099s, asset statements (varies by program) ### 4. **Use Our Calculators** Estimate your monthly payments and affordability: - [Affordability Calculator](/calculators/affordability) - [Rent vs Buy Calculator](/calculators/rent-vs-buy) - [Interest-Only Calculator](/calculators/interest-only) ### 5. **Download Resources** - [NON-QM Loan Qualification Checklist](/resources/forms-documents) - [Document Preparation Guide](/resources/forms-documents) - [Mortgage Glossary](/resources/mortgage-glossary) --- ## Why Choose NS Funding for NON-QM Loans? If you're self-employed, a gig worker, foreign national, or have non-traditional income, **NS Funding specializes in NON-QM loans** designed for your situation: - **$500M+ in funded loans** - **2,000+ satisfied clients** - **15+ years of NON-QM expertise** - **Licensed in 19 states** - **Fast approvals** (24-hour pre-qualification) - **Flexible guidelines** for all income types - **Competitive rates** starting at 7.00% **Ready to explore your options?** Call **(800) 917-1595** or [apply online today](/apply). --- *Disclaimer: This article is for educational purposes only and does not constitute financial advice. Loan terms, rates, and requirements are subject to change and vary by lender, borrower qualifications, and property type. Always consult with a licensed mortgage professional to discuss your specific situation.*