Many people require a mortgage to purchase a home, but this type of loan isn’t universally suitable. To assist you in finding the right home loan for your needs, here’s our guide to the five primary types of mortgages. There are five primary types of mortgages, each offering unique benefits and features:

• Conventional loan: Best for borrowers with strong credit scores.
• Jumbo loan: Suitable for borrowers with strong credit who are purchasing higher-priced homes.
• Government-backed loan: Designed for borrowers with lower credit scores and limited funds for a down payment.
• Fixed-rate mortgage: Preferred by borrowers seeking a consistent, predictable monthly payment throughout the loan term.
• Adjustable-rate mortgage (ARM): Suited for borrowers who may not stay in the home long-term, prefer lower initial payments or are comfortable with potential payment adjustments in the future.

Conventional Loans

Pros

• Offered by most lenders
• Can finance primary residences, second homes, vacation homes, and investment or rental properties
• Requires as little as a 3% down payment for a conforming, fixed-rate loan

Cons

• Requires 620 minimum credit score
• Has a lower debt-to-income (DTI) ratio threshold compared to other mortgage types
• Requires payment of private mortgage insurance (PMI) premiums if putting down less than 20%

Conventional loans, the most widely chosen type of mortgage, are available in two forms: conforming and non-conforming.

Conforming Loan: A conforming loan adheres to Federal Housing Finance Agency (FHFA) standards, which include criteria for credit, debt, and loan size. When a conventional loan meets these standards, it qualifies for purchase by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that dominate the mortgage market.

Non-Conforming Loan: Non-conforming loans do not meet one or more of the FHFA’s standards. One of the most prevalent types of non-conforming loans is the jumbo loan, which exceeds the conforming loan limit. Because they cannot be purchased by the GSEs, non-conforming loans are often viewed as riskier for lenders.

Conventional loans, the most widely chosen type of mortgage, are available in two forms: conforming and non-conforming. If you possess a robust credit score and can manage a significant down payment, opting for a conventional mortgage is highly advantageous. Conventional loans provide flexibility and cater to various homebuyers, particularly those with strong credit histories, steady incomes, and savings for a down payment.

They feature competitive interest rates and adaptable terms, appealing to buyers who meet the eligibility requirements. The 30-year fixed-rate option remains the preferred choice among homebuyers opting for conventional mortgages.

Government-backed loan

Pros

• Offers significantly more flexible credit and down payment guidelines
• Assists borrowers who may not qualify under stricter requirements

Cons

• Includes additional costs such as FHA mortgage insurance, USDA guarantee fees, and VA funding fee
• Restricted to borrowers purchasing homes within FHA loan limits, in rural areas, or for servicemembers

The U.S. government is not a mortgage lender, but it plays a crucial role in expanding homeownership opportunities for Americans by backing three primary types of mortgages:

USDA Loan: Backed by the U.S. Department of Agriculture (USDA), USDA loans assist moderate- to low-income borrowers in purchasing homes in rural, USDA-eligible areas. These loans do not impose credit score or down payment requirements but do include guarantee fees.

VA Loan: Guaranteed by the U.S. Department of Veterans Affairs (VA), VA loans are available to eligible members of the U.S. military (active duty, veterans, National Guard, Reservists) and surviving spouses. VA loans do not have a minimum down payment requirement, mortgage insurance, or strict credit score requirements, but they offer several other benefits.

FHA Loan: Backed by the Federal Housing Administration (FHA), FHA loans are available with a credit score as low as 580 and a down payment as low as 3.5%, or a score as low as 500 with a 10% down payment. FHA loans require mortgage insurance premiums, which increase overall costs and protect lenders in case of borrower default. Additionally, FHA loans have lower borrowing limits compared to conventional conforming loans.

If your credit score or down payment situation disqualifies you from a conventional loan, an FHA loan can serve as an appealing alternative. Similarly, purchasing a home in a rural area or being eligible for a VA loan may offer easier qualification options.

Government-backed loans generally cater to specific demographics. For instance, VA loans provide exclusive financing options for veterans, active-duty military personnel, and eligible surviving spouses. USDA loans are designed for homebuyers purchasing homes in designated rural areas. FHA loans, on the other hand, offer an excellent alternative to conventional financing and can be a more affordable option for individuals with below-average credit or smaller down payments.

Jumbo Loan

Pros

• Can finance more expensive homes
• Offers competitive interest rates, currently comparable to those on conforming loans
• Often the sole option in areas with high home values

Cons

• Not offered by every lender
• Typically requires a higher credit score, often a minimum of 700
• Typically requires a higher down payment, often ranging from 10% to 20%

Jumbo mortgages are home loans that exceed the FHFA’s conforming loan limits. In 2024, this translates to any loan amount over $766,550, or $1,149,825 in higher-cost areas. Due to their larger size and inability to be purchased by the GSEs, jumbo loans can pose higher risks.

If you’re aiming to finance a home with a purchase price that exceeds the current conforming loan limits, opting for a jumbo loan is the ideal choice. These loans are particularly suitable for buyers in high-cost real estate markets who require larger loan amounts. Homebuyers considering a jumbo loan typically have excellent credit, a low debt-to-income ratio, and significant assets.

Fixed-Rate Mortgage

Pros

• Stable monthly mortgage payment
• Simplifies budgeting

Cons

• Typically higher interest rates compared to introductory rates on adjustable-rate loans
• Requires refinancing to achieve a lower interest rate

Fixed-rate mortgages keep the same interest rate throughout the loan term, ensuring that your monthly mortgage payment—comprising loan principal and interest—remains constant. These loans commonly offer terms of 15 or 30 years, though some lenders provide flexible term options.

If you intend to remain in your home for an extended period and prefer a stable monthly payment (aside from potential increases in homeowners insurance premiums and property taxes), a fixed-rate mortgage is the ideal choice for you. Fixed-rate mortgages are ideal for those seeking the assurance of a consistent interest rate and monthly payment year after year, as these terms remain unchanged unless refinanced.

Adjustable-Rate Mortgage

Pros

• Lower initial rates
• Potential to pay less over time if prevailing interest rates decrease

Cons

• Potential for increased monthly payments over the loan term
• Challenges in budget planning due to rate fluctuations

Unlike fixed-rate loans, adjustable-rate mortgages (ARMs) feature interest rates that fluctuate over time. Typically, ARMs offer a lower, fixed introductory rate for a specified period. After this initial period, the rate adjusts periodically—either up or down—based on predetermined intervals for the remainder of the loan term.

For instance, a 5/6 ARM maintains a fixed rate for the first five years, followed by adjustments every six months depending on economic conditions until the loan is paid off. As the interest rate changes, so does your monthly mortgage payment, either increasing or decreasing accordingly.

If you do not intend to remain in your home for more than a few years, an ARM could potentially reduce your interest payments. However, it’s essential to be prepared for the possibility that your payments may increase if you remain in the home beyond the initial fixed period. ARMs are suitable for buyers who anticipate moving or refinancing before the fixed period concludes. This includes professionals who relocate frequently, individuals expecting substantial income growth, or those planning to sell their home within a few years.

Other Types of Mortgages

Interest-only Mortgage

An interest-only mortgage involves making payments solely on the interest for a specified period, typically five or seven years, after which payments cover both principal and interest. These loans are ideal for borrowers confident they can sell, refinance, or comfortably manage higher monthly payments in the future.

Construction Loan

If you plan to build a home, you cannot use a conventional mortgage to finance it since there is no existing property to secure the loan. Instead, you can opt for a construction loan, particularly a construction-to-permanent loan that transitions into a standard mortgage once you move into the home. These short-term loans are most suitable for borrowers capable of making a substantial down payment.

Renovation Mortgage

If you’re looking to buy a home that requires significant renovations, a renovation loan could be the solution. These loans consolidate the costs of purchasing and repairs into a single mortgage.

Balloon Mortgage

Balloon mortgages involve making payments based on a 30-year term, typically for a short period like seven years. At the end of this term, a large payment on the remaining balance is due, which can be challenging to manage if not planned for in advance.

Piggyback Loan

A piggyback loan, often called an 80/10/10 loan, consists of two separate loans: one covering 80% of the home price and another covering 10%. The borrower is responsible for a required down payment of the remaining 10%. These loans are structured to help borrowers avoid mortgage insurance and the need for a jumbo loan, but they also entail two sets of closing costs.

Physical Loan

Physician loans are tailored for medical professionals such as doctors, nurses, and dentists who may have significant medical school debt. These loans accommodate the unique financial circumstances of medical professionals by considering factors like income, assets, credit history, and debt load.

Non-Qualifying Loan

Non-qualifying mortgage (non-QM) loans do not adhere to certain standards set by the Consumer Financial Protection Bureau (CFPB), allowing for more lenient credit and income requirements. These loans can be appealing to borrowers with unique circumstances, such as fluctuating earnings, foreign income, or a history of bankruptcy. However, non-QM loans may involve higher down payments and interest rates as compared to traditional mortgage options.

Portfolio Loan

While many lenders sell the mortgages they originate to investors, some opt to retain them in their loan portfolio, keeping them “on the books.” By holding onto these loans, lenders can potentially offer more flexible qualifying requirements compared to loans sold to conform with FHFA standards. However, such loans may also come with higher fees.

Which type of mortgage is right for you?

Depending on your credit and financial situation, multiple types of mortgages could be suitable for you. Conversely, certain loan types may be immediately disqualified based on your circumstances. For instance, you cannot qualify for a VA loan if neither you nor your spouse has served in the military.

Understanding the distinctions between conventional loans, government-backed loans, jumbo loans, fixed-rate mortgages, and adjustable-rate mortgages is crucial. Each type offers unique advantages tailored to different financial situations and objectives. When evaluating mortgage options, it’s important to consider the total cost of the loan over its duration, including interest payments and associated fees.

When considering which type of mortgage to choose, focus on these factors:

• Credit Score: Determine which loan types you qualify for based on your credit score.
• Down Payment: Assess whether you need a low- or no-down payment loan, and consider options like down payment assistance or using gift funds.
• Debt and Income: Evaluate whether your monthly income, after accounting for debt payments, is sufficient to cover a mortgage.
• Risk Preference: Decide if you prefer a stable monthly payment (fixed-rate mortgage) or are comfortable with potential rate changes (adjustable-rate mortgage). Consider your future earning potential.
• Future Plans: Consider your short-term relocation plans and whether you aim to pay off the mortgage sooner than the standard term of 30 years.

Once you’ve considered these questions, compare mortgage lenders and begin discussions with loan officers. They can assist you in identifying the best mortgage option tailored to your needs and guide you through the process of securing that mortgage.