When it comes to home loans, borrowers have a staggering array of options. Understanding the different mortgages available before you shop for a loan can save you time, effort and potentially thousands of dollars down the road
This guide covers the most popular types of mortgage loans available today, including loans for first-time homebuyers, investors and retirees. You may discover options you didn’t know about but could be the perfect fit for your situation.
What is a mortgage loan?
A mortgage is a secured loan from a bank or other financial company that makes it possible to buy a home without having to cover the total cost yourself. While every mortgage has different characteristics, they’re all comprised of three basic parts:
- The loan term. This is the amount of time you have to pay back your loan. Common terms are 15 or 30 years. The shorter the loan term, the less interest you’ll pay.
- Interest rate type. Mortgage interest rates can either be fixed or adjustable. Adjustable-rate home loans often have lower rates at the beginning, whereas fixed-rate loans offer more payment predictability.
- Loan type. The most common types of home loans are:
- Conventional: Multiple types available
- Government-backed: FHA, VA, USDA
- Loans for high-wealth individuals, investors and retirees: Jumbo loans, reverse mortgages and more
Let’s take a closer look at the different types of mortgage loans and the options available.
A conventional mortgage is a type of home loan that isn’t part of a government program. It’s by far the most common type of mortgage. But it may be harder to qualify for a conventional loan than a government-backed loan, which typically has lower credit score requirements.
Who can qualify for a conventional loan?
While lenders have the flexibility to set their own requirements, borrowers must typically have the following to qualify for a conventional loan:
- A credit score of 620 or higher
- A debt-to-income ratio of 50% or lower
- A down payment of at least 3%
Conventional loans fall into two categories: conforming and nonconforming, which refer to the size of the loan. Here’s a quick overview of the difference.
Conforming vs. nonconforming loans
- Conforming loans have a maximum loan amount set by the US Federal Housing Finance Agency (FHFA).
- In 2022, the maximum loan amount you can borrow for a conforming loan is $647,200 in most counties in the US. In Alaska and Hawaii, the maximum amount you can borrow is $970,800 (150% of the base amount of $647,200).
- Nonconforming loans have a much higher maximum loan amount than conforming loans, with borrowing limits that vary from lender to lender.
- Jumbo loans are a type of nonconforming loan, with limits that can go as high as $1 to 2 million or higher, depending on the lender and the borrower’s eligibility.
Types of conventional mortgages
Here are the main types of conventional mortgages and who they’re ideal for.
|Fixed-rate loans have a set interest rate for the entire life of the loan. Payments stay the same from month-to-month, making it easier to budget. Fixed-rate loans may have higher rates than adjustable-rate mortgages.||Want predictability in their monthly mortgage payment over the long term|
|Adjustable-rate loans have an interest rate that is usually fixed for an initial “teaser” period — for example, three or five years. After the initial period ends, your rate and payment will change — either go up or down — depending on market conditions.|
- Want a lower rate than what a fixed-rate loan can offer
- Believe rates will be low in the future
- Don’t plan on staying in the home past the initial rate period
|Low or no down payment. Fannie Mae HomeReady and Freddie Mac Home Possible are conventional loans that allow borrowers to put down as little as 3%.|
- Are low to moderate income
- Are first-time homebuyers
- Don’t have a lot of cash for a down payment
|Renovation loans are single loans that can be used to purchase a fixer-upper and pay for renovations at the same time. With renovation loans, there may be a time limit on when the renovations must be completed.||Are confident that the project will be cheaper than buying a new home or for whom the long-term benefits outweigh the costs|
|Jumbo loans are nonconforming home loans with amounts that exceed the FHFA loan limit — which is currently $647,200 in most counties and $970,800 in high-cost areas, such as Alaska or Hawaii.|
- Have excellent credit and can show strong creditworthiness
- Need a significantly higher loan amount than a conforming loan
- Can put down at least 20% or more
|Special program mortgages. Many credit unions offer special programs to select groups of borrowers, for example:|
- Mortgages with no down payment and no PMI
- Physician, medical professional and other profession-specific home loans
- Home loans for people working in the cannabis industry
|Want a loan through a credit union offering greater flexibility and financial benefits that bigger lenders may not be willing to extend|
Government-backed mortgages (FHA, VA and USDA)
Government-backed mortgages are insured by the federal government. If a borrower defaults on a government-backed loan, Uncle Sam foots the bill rather than the lender. Because these loans are guaranteed, lenders can often offer lower interest rates to borrowers.
Unlike conventional loans, government-backed mortgages are generally easier to qualify for. To qualify for a conventional loan, a borrower typically must have:
- A credit score of 580 or higher
- A debt-to-income (DTI) of 57% or lower
- A 3.5% down payment for FHA loans — VA and USDA loans have no down payment requirement
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). FHA loans can be a good choice for first-time homebuyers because they have less stringent lending requirements than other types of loans, including other government-backed loans.
FHA loans can be used to purchase a primary residence, to refinance an existing mortgage or for other purposes.
The main types of FHA loans:
|General purchase. Fixed and adjustable-rate FHA mortgages for low- to moderate-income borrowers. In 2021, loan limits are $420,680 for single-family FHA home loans and up to $970,800 for high-cost areas.|
- A 3.5% down payment
- A minimum credit score of 580 — although some lenders raised this limit in 2020
- For borrowers with credit scores between 500 and 579, you may be able to qualify with 10% down
|Low- to moderate-income borrowers and first-time homebuyers|
|203(k). A renovation loan to pay for a home and renovations at the same time. Geared towards low- to moderate-income borrowers who will live in the home.|
- A 3.5% down payment for credit scores of 580 and up
- A 10% down payment for credit scores between 500 and 579
|Borrowers looking to combine a first mortgage with renovation costs in a single loan|
|Energy efficient. This program allows borrowers to add the cost of energy-efficient improvements into their new or existing home. It’s available as part of a new FHA loan mortgage or by refinancing your existing mortgage loan.||Available to low- or moderate-income borrowers who meet the income requirements for FHA’s Section 203(b)||Borrowers looking to save on their home’s long-term energy cost|
|HECM reverse. A Home Equity Conversion Mortgage (HECM) allows homeowners to withdraw from their home’s equity in the form of a fixed monthly payment, a line of credit or a combination of both.|
- You must be at least 62 or older
- No income or credit score requirement
|Retirees looking to eliminate their mortgage payments and who don’t plan on bequeathing the house|
A VA loan is a $0-down mortgage loan for veterans, active military members and their spouses. VA loans are originated by private lenders and are partially guaranteed by the Department of Veterans Affairs (VA). VA loans can either be used to purchase a primary residence or to refinance an existing mortgage.
|General purchase. For eligible veterans, service members and survivors with full entitlement, there are no lending limits on loans over $144,000. For those with remaining entitlement, there are VA loan limits based on where you live.|
- Must meet the minimum active-duty service requirement
- Ideally have a credit score of at least 650, but there is no minimum credit requirement
- There is no down payment requirement for VA loans
|Current and ex-military members and their spouses|
Other things to know about VA loans:
- Secure multiple VA loans, even if you’ve declared bankruptcy, lost a home to foreclosure or currently have a VA loan.
- VA loans don’t carry a private mortgage insurance (PMI) requirement.
- VA loans have a funding fee requirement of 2.3%.
- There’s no lending limit, except for what the lender imposes.
A USDA loan is a $0 down, low-interest mortgage for rural property owners. USDA loans are issued by lenders and backed by the USDA (US Department of Agriculture). USDA loans can either be used to purchase a primary residence or to refinance an existing mortgage.
|General purchase. USDA loans are typically used to finance homes under 2,000 square feet or less, and have loan limits that vary by county. In 2021, these limits range from $285,000 and up.|
- A credit score of at least 640
- An adjusted household income of 115% or less of the area median income
- Borrowers must be low- to moderate-income persons who meet specific eligibility criteria and can demonstrate a stable income history
|Borrowers looking to purchase a home in a USDA-designated rural area|
A reverse mortgage is a special type of loan that allows homeowners to borrow against a home’s equity to get rid of monthly mortgage payments. Available for homeowners 62 and older, reverse mortgages are paid off after the borrower no longer lives in the home.
Reverse mortgages come with risk, so understand your obligations before taking out this type of loan. For example, you must continue to pay property taxes and home insurance while you have a reverse mortgage, or you could lose your home.
There are three types of reverse mortgages:
- Single-purpose reverse mortgage. Allows homeowners to tap into their home’s equity to pay for approved expenses, such as property taxes or necessary home repairs.
- Proprietary reverse mortgage. Allows owners of high-value properties to access higher levels of equity. The higher the value of the home and the greater the equity, the more funds you may qualify for.
- Home equity conversion mortgage (HECM). HECMs are FHA-insured reverse mortgages. Fees for this type of reverse mortgage tend to be higher, but funds can be used for any purpose.
- You must be 62 or older
- Your home must be your primary residence
- You must own the home or have a low mortgage balance
Other things to know about reverse mortgages:
- Reverse mortgages carry financial risk. If you fail to meet certain agreements, you could lose your home.
- Money received from the reverse mortgage generally isn’t taxable.
Term and rate considerations
When it comes to choosing a home loan, it’s important to consider your interest rate and term. Even a small fraction of a percentage point difference in APR could cost or save you tens of thousands over the life of the loan. Compare rates and get multiple quotes to ensure you’re getting the best deal possible.
Your loan’s term also has a massive impact on how much interest you pay. While a 30-year mortgage may have more affordable payments than a 15-year loan, you’ll end up paying more in interest.
For example, on a $350,000 15-year loan at 4%, you’ll pay a total of $116,003 in interest. The same loan with a 30-year term will cost you $251,543 in interest — over $135,500 more.
Do I need a 20% down payment to get a loan?
No. A common myth among homebuyers is that you need a large down payment. The fact is, many lenders offer loans that let you purchase a home for as little as 3% or 3.5% down — or even zero in some cases. The type of property you’re purchasing can also affect your down payment. For instance, condominiums often require higher down payments than single-family residences.
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Whether you’re a new homebuyer or want to refinance your existing mortgage, there is probably a loan type to suit you. When you understand the different loan options available to you, you’ll be able to confidently negotiate for the best loan to suit your needs. If you’re ready to start looking, compare mortgage lenders that can help you through the entire process.
Frequently asked questions
How do I get the best mortgage rate?
Generally speaking, you can get a lower rate by:
- Having excellent credit
- Going with a shorter term (15 years vs. 30 years)
- Getting multiple quotes from different lenders, including online lenders and credit unions
What’s the difference between prequalification and preapproval?
Prequalification is an estimate of what you can borrow and typically involves a soft credit check only. With a preapproval, a hard credit check is performed to verify your income, assets and tax returns. A preapproval tells you exactly what you can borrow.
I don’t have time to compare loans. How much does it cost to use a mortgage broker?
Be prepared to pay at least 2% to 5% of your loan’s total value in commissions.