Home Loans: Types, Requirements, and How They Work

A home loan, or mortgage, is money you borrow to buy a house, with the property serving as collateral.^[1] You receive a lump sum up front to buy the home, then repay it over 15 to 30 years. Your monthly payment includes the principal, interest, taxes, insurance, and, often, private mortgage insurance (PMI).

Down payment and credit score requirements vary by loan type (conventional, FHA, VA, and USDA). Understanding your options before you apply can help you choose the right mortgage loan and potentially save you money.

What Are Home Loans?

A home loan, or mortgage, is borrowed money you use to buy a residential property. It’s a long-term commitment that usually spans 15 to 30 years. Most people need a mortgage to buy their first home.

Here are the key elements of a home loan:

• Secured loan: The house functions as security for the loan.

• Typical loan terms: Most mortgages last for 15 to 30 years.

• Monthly payment: Typically, this includes principal, interest, taxes, and insurance.

You pay a portion of your home’s purchase price up front (your down payment), and the lender covers the rest, which is your loan amount. You repay the lender in monthly installments. Since the home serves as collateral, the lender can take it if you default on your mortgage payments.

Types of Home Loans

Home loans come in several forms. Each loan option is for a different borrower type and financial situation. The best home mortgage for you depends on your credit, down payment, income, and situation.

Loan Type	Minimum Credit Score	Minimum Down Payment	PMI Required	Best For
Conventional	620	3%	Yes for down payments less than 20%	Strong credit borrowers
FHA	580 500	3.5% 10%	Yes	First-time buyers
VA	No set minimum; lenders prefer at least 620	0%	No	Eligible military buyers
USDA	None	0%	No, but a 1% up-front guarantee fee and an annual 0.35% guarantee fee	Low-to-moderate-income rural buyers

Now, let’s take a look at each type of home loan in more detail.

Conventional loans

Conventional loans don’t have backing from the federal government, and they typically have stricter requirements.^[2] You’ll usually need a credit score of at least 620 and a down payment between 3% and 20% to qualify. If you put down less than 20%, you’ll likely pay mortgage insurance premiums.

FHA loans

The Federal Housing Administration (FHA) offers a government-backed option for lower-credit and first-time homebuyers to make homeownership more accessible. You can qualify with a credit score as low as 500 and a down payment as little as 3.5%.^[3] But you’ll pay PMI, even if you put more money down.

Veterans Administration (VA) loans

Loans from the Department of Veterans Affairs are a major benefit for eligible military service members, honorably discharged veterans, and some surviving spouses. VA loans don’t require a down payment or PMI, and you can usually get a lower interest rate, which can save you a lot of money over the life of the loan.^[4]

USDA loans

U.S. Department of Agriculture (USDA) loans help people buy a primary residence in eligible rural areas. They offer zero-down-payment, fixed-rate mortgages at competitive rates with no minimum credit score. That said, you’ll need to meet income limits and location requirements.

Although you won’t pay PMI, you’ll pay a 1% guarantee fee at closing and an annual 0.35% fee, which the USDA will roll into your monthly mortgage payments.

Fixed-Rate vs. Adjustable-Rate Mortgages

When you choose a home loan, you’ll also get to pick how interest applies. The two main interest options are fixed and adjustable rates, which affect how predictable your monthly payments will be.

Fixed-rate mortgages

A fixed-rate mortgage keeps the same interest rate for the life of the loan. Although your principal and interest amounts stay the same, your taxes and insurance premiums may change each year.

Fixed-rate loans are best for homeowners who plan to stay in their house long-term and want consistent, predictable payments without worrying about market changes.

Adjustable-rate mortgages (ARMS)

An ARM starts with a lower interest rate that can adjust with market conditions after a set period. Rates can change once or twice per year, depending on the ARM terms.

Adjustable-rate mortgages are best if you expect to move or refinance before the rate adjusts.

Home Loan Requirements and Qualifications

Mortgage lenders look at a few core factors when deciding whether to approve your loan and the rate you qualify for. They review your income, credit score, how much debt you have, your employment history, any savings or assets you already have, and the home value. Each factor helps the loan officer figure out how likely you are to repay the loan.

Eligibility requirements can vary depending on the loan type. For example, conventional loans often require credit scores of 620 or higher, while the FHA’s minimum credit score is 500. The USDA doesn’t require a minimum credit score, but it does set a maximum income limit to qualify.

Your debt-to-income (DTI) ratio shows how much of your paycheck already goes towards other debts. Most lenders prefer your debts to be below about 43% of your income, but some mortgage options allow up to 50%.

Credit score requirements

Your credit score tells lenders how reliable you are at paying back your debts. A higher score can help you qualify for better rates and lower monthly payments.

Most conventional loans require a score of at least 620, but FHA loans may allow scores as low as 500. Conventional lenders also provide VA loans, so they have similar requirements, though they’re usually more flexible for VA borrowers. The USDA doesn’t have a minimum credit score.

Debt-to-income (DTI) ratio

Your DTI ratio compares your monthly debt payments to your gross monthly income. Most lenders prefer it under 43% but may go as high as 50%. It’s usually harder to qualify if too much of your income is already tied up in debt, so you may need to pay down some debt to get a home loan.

Income and employment verification

Lenders want to see steady, reliable income, especially for long-term loans like mortgages. You’ll usually need to provide proof of employment and income, like pay stubs and tax returns.

A consistent job history of two years or more helps strengthen your loan application and improve your approval odds.

Down payment and assets

The down payment is the amount you pay toward the purchase price of your home. You don’t need a down payment with a VA or USDA loan, and you can get an FHA loan with as little as 3.5% down. Conventional loans are available with as little as 3% down, but you’ll pay PMI with a low down payment and won’t qualify for the best rates.^[6]

Lenders also want to see that you have enough assets to help cover your down payment, closing costs, and future mortgage payments. The larger your down payment and the more assets you have, the better your chances of approval are.

What Does a Home Loan Payment Include?

Your monthly mortgage payment includes several different costs: the principal, interest, property taxes, homeowners insurance, and PMI (if required).

• Principal: The amount you borrow from the lender to buy your home. At first, only a small portion of your payment goes toward the principal, but the portion grows over time.

• Interest: The fee the lender charges you for borrowing money. Most of your payment goes toward interest early in the loan.

• Property taxes: These are local taxes based on your home’s value, not the purchase price. Many lenders collect them monthly and hold them in an escrow account until payment is due.

• Homeowners insurance: A home insurance policy covers your home from damage or loss. Lenders require homeowners insurance to protect their financial interest until you pay off the mortgage. Like taxes, your lender will collect the premium monthly and pay it in full each year.

• Private mortgage insurance: You’ll likely pay PMI if you put down less than 20%. It protects the lender if you stop making loan payments.

When you add all these together, you get your total monthly payment. If your lender doesn’t hold an escrow account for your mortgage, your payment won’t include property taxes or homeowners insurance. You’ll be responsible for paying them directly to your tax office and insurance company.

How Home Loans Work

The home loan process typically starts with pre-approval. A lender looks at your income, credit, and debts to estimate how much you can borrow. Getting prequalified gives you a clear price range before you start house hunting.

Once you find a home and the seller accepts your offer, the lender begins underwriting. They’ll order an appraisal to confirm the house is worth the purchase price and double-check your financial details to make sure you still qualify for the mortgage.

After you receive final approval, you’ll go to settlement to close on the loan. You’ll sign loan documents, pay closing costs, and officially become a homeowner.

Down Payment Options by Loan Type

Down payments vary depending on the loan type you choose. Some loans don’t require any money down, while others require a minimum of 3%–10%.

Here are the down payment options for each loan type.

Loan Type	Minimum Down Payment
Conventional	3%
FHA	3.5% 10%
VA	0%
USDA	0%

If you’re having trouble coming up with a down payment and don’t qualify for a 0% down option, you may qualify for a down payment assistance program.

Some are low-interest loan programs that you have to repay. Others are grants you don’t have to pay back. Check with your lender or state to see which down payment assistance programs are available and how to qualify.

Home Loan Interest Rates and Costs

Your interest rate plays a big role in how much you’ll pay over the life of your home loan. Interest rates vary by lender and are based on several factors. Even a small difference can add up to thousands of dollars over the life of a mortgage, which is why comparing offers is worth it.

What factors affect mortgage interest rates?

Your mortgage interest rate depends on your:

• Credit score and history: Better scores and a favorable history usually mean lower rates.

• Down payment amount: More money down lowers your interest rate and monthly payment and may help you avoid PMI.

• Loan type: Some loan types offer lower rates.

• Interest type: Fixed-rate mortgages often have higher interest rates, but variable-rate mortgages can increase over time.

• Loan term: Choosing a shorter term can save on interest over the life of your mortgage but raises your monthly payment.

• Market conditions: Inflation and the economy affect rates.

15-year vs. 30-year mortgage costs

Your loan term affects your total mortgage costs. A longer term means you have a lower monthly payment, but you pay more interest over time.

The table below shows example 15-year and 30-year mortgage interest rates from a sampling of mortgage lenders.

Lender	15-Year Interest Rate	30-Year Interest Rate
Mutual of Omaha Mortgage	5.875%	6.75%
Aurora Financial	5.375%	5.99%
Sage Home Loans Corporation	5.625%	6.250%
HomeSimply	5.625%	6.374%

Rates shown were current as of June 3, 2026, based on information publicly available on each lender’s website. Mortgage rates change. Check a lender’s website for up-to-date rates.

APR vs. interest rate: What’s the difference?

The interest rate is what you pay to borrow money. Your annual percentage rate (APR) includes the interest rate plus any additional fees or extra costs, such as loan origination fees and mortgage insurance. The APR shows the true cost of the loan each year.

Steps to Get a Home Loan

Here’s how to get started with the mortgage process for a home loan:

1. Check your credit. Start by reviewing your credit report and score. Fix any errors and, if you can, pay down debt to lower your DTI. Even small improvements can help you qualify for better rates.

2. Save for a down payment. Set aside money for your down payment and closing costs. This can take time, so many buyers plan months or even years ahead if they don’t qualify for 0% down loan options.

3. Get pre-approved. Apply with a few lenders within a 45-day window to ensure you get only a single hard credit check for multiple inquiries. Pre-approval shows sellers you’re serious and gives you a firm budget.

4. Find a property. Work with a real estate agent to find homes that fit your needs and price range.

5. Submit an offer. Once you find the right home, make an offer. If the seller accepts, you move on to the next step. If not, go back to step four.

6. Get an appraisal. Your lender will order an appraisal to make sure the house is worth the price you agreed to pay.

7. Complete underwriting. The lender reviews everything in detail. You may need to send additional documents during this step.

8. Conduct a home inspection. Hire a professional to inspect the home for issues. This helps you avoid unexpected repairs after purchase.

9. Secure homeowners insurance. Provide details about the home, your lender’s address, and your loan number to your insurance company. You’ll need home insurance in place before closing.

10. Close on the loan. Sign the final paperwork and pay closing costs. Once that’s done, the house is yours, and your mortgage payments begin.

The entire process typically takes between 25 and 60 days after you submit your loan application.

Home Loans FAQs