Ways to Finance a House: Loan Options and Assistance Programs

Buying a home is one of the biggest financial decisions most people will make, and figuring out how to pay for it can be overwhelming. With rising home prices and varying credit requirements, securing the right financing makes homeownership more accessible.

There are multiple loan options, including conventional mortgages, government-backed programs, and private lender alternatives. Some buyers may also qualify for down payment assistance to reduce upfront costs. Understanding these choices helps borrowers determine the best path to purchasing a home.

Conventional Loans

Conventional loans are issued by private lenders without federal backing. They follow guidelines set by Fannie Mae and Freddie Mac, which influence eligibility, loan limits, and underwriting standards. In 2024, the conforming loan limit for most U.S. areas is $766,550, with higher limits in expensive regions. Loans exceeding these amounts are considered jumbo loans, which require stronger credit and financial qualifications.

Lenders evaluate applicants based on credit scores, debt-to-income (DTI) ratios, and down payments. A minimum credit score of 620 is typically required, but borrowers with scores above 740 receive better interest rates. DTI ratios generally need to be below 45%, though exceptions exist for those with strong financial profiles. Down payments start at 3% for first-time buyers, while others may need at least 5%. Borrowers putting down less than 20% must pay private mortgage insurance (PMI), which increases monthly costs but can be removed once equity reaches 20%.

Interest rates depend on market conditions, creditworthiness, and loan terms. Fixed-rate mortgages provide stable payments, while adjustable-rate mortgages (ARMs) start with lower rates that adjust periodically. ARMs can be beneficial for short-term homeowners but carry the risk of rising payments. Loan terms typically range from 15 to 30 years, with shorter terms leading to higher monthly payments but lower overall interest costs.

Government-Backed Loans

For borrowers who may not qualify for conventional loans, government-backed mortgages offer alternatives with lower credit and down payment requirements. These loans, insured by federal agencies, reduce lender risk and expand access to homeownership. The three main types are FHA, VA, and USDA loans.

FHA Loans

Federal Housing Administration (FHA) loans cater to borrowers with lower credit scores or limited savings. A minimum down payment of 3.5% is required for applicants with credit scores of 580 or higher. Those with scores between 500 and 579 must put down at least 10%. FHA loans require both an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount and an annual mortgage insurance premium (MIP), which ranges from 0.45% to 1.05%, depending on loan terms and loan-to-value (LTV) ratios.

FHA loan limits vary by location and are updated annually. In 2024, the standard FHA loan limit is $498,257, while high-cost areas have limits up to $1,149,825. These loans allow higher DTI ratios—often up to 57% with compensating factors—making them accessible to borrowers with existing debt. However, MIP payments typically last for the life of the loan unless refinanced into a conventional mortgage.

VA Loans

Veterans Affairs (VA) loans are available to eligible military service members, veterans, and certain surviving spouses. These loans require no down payment and do not impose private mortgage insurance (PMI), reducing overall costs. Instead, borrowers pay a one-time VA funding fee, ranging from 1.25% to 3.3% of the loan amount, depending on service history and prior use of the benefit. Some veterans, such as those with service-connected disabilities, may qualify for a funding fee exemption.

VA loans offer competitive interest rates and flexible credit requirements. While the VA does not set a minimum credit score, most lenders require at least 620. These loans also allow higher DTI ratios, often exceeding 50% for borrowers with strong residual income. There are no official loan limits, but lenders may impose their own caps based on financial qualifications. VA loans also provide foreclosure protections and refinancing options, such as the Interest Rate Reduction Refinance Loan (IRRRL), which simplifies refinancing for existing VA borrowers.

USDA Loans

The U.S. Department of Agriculture (USDA) offers loans to homebuyers in eligible rural and suburban areas through its Rural Development program. These loans require no down payment and offer low interest rates, making them attractive to low- to moderate-income borrowers. Income limits vary by location and household size, with most areas capping eligibility at 115% of the median household income.

USDA loans come in two forms: Guaranteed Loans, issued by private lenders and backed by the USDA, and Direct Loans, funded by the government for very low-income borrowers. Guaranteed Loans require an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35%, both of which can be rolled into the loan balance. These loans have lower mortgage insurance costs than FHA loans, reducing monthly payments.

Property eligibility is determined by location, with the USDA providing an online tool to check if a home qualifies. Borrowers must demonstrate stable income and a DTI ratio typically below 41%, though exceptions exist for those with strong financial profiles. These loans benefit buyers in less densely populated areas who may struggle to save for a down payment or qualify for conventional financing.

Private Lenders

For homebuyers who do not meet traditional mortgage criteria or need more flexible financing, private lenders offer alternatives. These lenders operate outside conventional banking systems, often providing faster approvals and fewer bureaucratic hurdles. Private mortgage providers set their own underwriting standards, which can benefit borrowers with non-traditional income sources, such as self-employed individuals.

Interest rates from private lenders are generally higher than those from banks and credit unions due to increased risk. Instead of relying solely on credit scores and standardized debt-to-income calculations, these lenders may focus on asset-based lending, where the property’s value plays a larger role in loan approval. This is common with hard money loans, which are short-term, high-interest loans often used by real estate investors planning to renovate and resell properties.

Private loans often have shorter repayment periods and balloon payments, requiring full repayment after a set number of years. Some lenders offer interest-only payment options, which keep initial costs low but do not reduce the principal balance. While these arrangements can be useful in specific situations, they require careful financial planning to avoid repayment challenges.

Down Payment Assistance

For many prospective homebuyers, saving for a down payment is a significant hurdle. Various down payment assistance (DPA) programs exist at the local, state, and national levels, offering grants, forgivable loans, and deferred-payment loans to eligible buyers.

DPA programs are typically run by housing finance agencies, nonprofit organizations, and some employers. Eligibility is often based on income level, location, and first-time homebuyer status. Many state-backed programs set income limits based on median household earnings to ensure assistance reaches those who need it most. Some initiatives also target specific groups, such as educators, emergency responders, or healthcare workers, offering additional financial support.

Repayment structures vary. Some programs provide grants that do not require repayment, while others offer loans forgiven after a set number of years if the buyer remains in the home. Deferred-payment loans, which require no monthly payments but must be repaid when the home is sold or refinanced, allow buyers to secure a property without immediate financial strain. These programs help reduce upfront costs, making homeownership more accessible to those with limited savings.