Types of Mortgage Loans: What Homebuyers Need To Know
One of the most important considerations to make when you buy a home is how to finance your purchase. But with many loan types available, each with its own characteristics and requirements, picking the right one can be overwhelming. GOBankingRates has put together this overview of the major types of mortgage loans to help make your decision a little easier.
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Types of Mortgage Loans
There’s no one best mortgage loan for every buyer, so it’s important to understand your options. Keep reading to learn about the following types of mortgage loans:
Fixed-rate mortgage
Adjustable-rate mortgage
Conventional mortgage loan (conforming)
Jumbo mortgage loan
FHA loan
VA loan
USDA loan
Fixed-Rate and Adjustable-Rate Mortgages
One way to categorize mortgage loans is by how you repay them. It makes sense to start there because every mortgage loan falls within these categories or some variation on them.
Fixed-Rate Mortgage
A fixed-rate mortgage loan has a single interest rate throughout the entire term of the loan, so it’s unaffected by volatile interest rates. And because the rate stays the same, the payment stays the same, too. Fixed-rate loan terms range from 10 years to 30 years, depending on your loan type.
A primary benefit of a fixed-rate loan is that it’s easy to budget for — you always know exactly how much your payment will be. Also, these loans are fully amortizing, which means that your last scheduled payment will pay the loan off in full. And while you won’t get to take advantage of a low promotional rate or falling interest rates, should they occur, fixed-rate loans offer protection from rising rates. They’re often the best choice for buyers who plan to live in their homes for many years.
Adjustable-Rate Mortgage
An adjustable-rate mortgage starts out with a fixed-rate period, such as three years. After that, the rate adjusts periodically, according to a predetermined schedule — three, five or seven years, for example.
ARMs are expressed using the fixed-rate term followed by the adjustment frequency. For example, a 3/1 ARM has a fixed rate for three years, and the rate adjusts every year after that. Lenders often offer ARMs at a promotional initial rate, which can save you money if you plan to sell your home before the rate resets.
The rate can go up or down each time it adjusts, so ARM payments can be unpredictable and difficult to budget for in the long term. However, they usually have caps on the amount the rate can increase with any one adjustment and over the life of the loan. On the downside, some also cap how low the rate can drop, and you might even see an ARM with a rate that can increase but never fall.
One thing to watch for with an ARM is whether it’s fully amortizing — that is, whether your payments are applied to both principal and interest and whether the last payment will repay the loan in full. Some ARMs allow you to make interest-only payments, for example, that leave you with a balloon payment that pays off the balance at the end. If those interest payments don’t cover all the interest the loan has accrued, your balance will actually increase over time.
Conventional Mortgage Loan (Conforming)
Conventional loans are mortgage loans that are not backed by the U.S. government. Fannie Mae and Freddie Mac — private companies that, as government-sponsored enterprises, operate with oversight from the Federal Housing Finance Agency — guarantee and usually buy those loans that conform to eligibility standards set by the FHFA.
Conforming loans are the conventional loan standard. Their amounts fall within limits set by the FHFA. The agency sets one limit for the contiguous United States and another for Alaska, Guam, Hawaii and the U.S. Virgin Islands, which are designated high-cost areas. The standard limit for single-family homes is $766,550 for 2024, and the high-cost limit is $1,149,825.
Conventional loans are by far the most popular choice, making up about 70% of the market. They’re also the most widely available — qualified borrowers can get one from any bank that offers mortgage loans or take one out through a nonbank mortgage company.
You can get a conventional loan with a fixed rate for a term of 10 to 30 years. Standard conventional ARMs range from 3/6 months to 10/6 months.
Pros and Cons of Conventional Conforming Loans
Conventional loans are the most common type for good reason. But they also have some drawbacks to consider.
Pros
Available from just about any mortgage lender
May have fewer fees than government-backed loans
Can be used for a second home or investment property with up to four units
Cons
Harder to qualify for than government-backed loans
Must pay private mortgage insurance unless you make at least a 20% down payment
Rates usually higher than for government-backed loans
Eligibility Criteria
To qualify for a conforming conventional loan, you’ll have to meet the following criteria:
Minimum down payment: 5% for primary home (3% for certain loans for lower-income buyers); 10% for second home; 15% for investment property
Maximum debt-to-income ratio: 45%
Minimum credit score: 620
Jumbo Mortgage Loan
Jumbo loans are also conventional loans, but they’re nonconforming — that is, they’re for amounts above the limits for conforming loans. For a single-family home in a standard-priced area, that means loans larger than $766,550 in 2024. In high-priced areas, including Alaska, Guam, Hawaii and the U.S. Virgin Islands, a jumbo loan is a conventional loan for more than $1,149,825.
Because they exceed conforming loan limits, jumbo loans are ineligible for purchase by Fannie Mae and Freddie Mac. Lenders set their own criteria, which tend to be stricter than for conventional loans.
Lenders also decide on the terms to offer with jumbo loans. Chase, for example, has 15- and 30-year fixed-rate jumbos and 5/6-month and 7/6-month ARMs. It also offers a 10/6-month interest-only jumbo ARM.
Pros and Cons of Jumbo Loans
For some buyers, the pros of having a jumbo loan outweigh the cons.
Pros
Can borrow more than with a conforming loan
Doesn’t have to adhere to Fannie Mae/Freddie Mac guidelines
Cons
More difficult to qualify for than conforming loan
Usually has higher rates and closing costs
Eligibility Criteria
Lenders often set higher standards for jumbo loans than for conforming loans. For example, Rocket Mortgage recommends buyers have the following:
Minimum down payment: 20%
Maximum debt-to-income ratio: 45%
Minimum credit score: 680
Your lender might also require that you have cash reserves to fall back on in case your financial situation changes. It’s a good idea to have 18 months’ worth stashed away in a savings or retirement account.
FHA Loan
An FHA loan is a mortgage loan insured by the Federal Housing Administration, which is an agency within the U.S. Department of Housing and Urban Development. That government backing means it’s not a conventional loan, so buyers don’t have to meet Fannie Mae/Freddie Mac standards to get one. And because the federal government insures the loans, lenders can be a bit more lenient when it comes to borrower qualifications.
Good examples of that include credit and down payment requirements. Whereas most buyers need at least a 620 credit score and must pay 5% down for a conventional loan, they need just 3.5% for an FHA loan as long as their credit score is at least 580. But borrowers with scores as low as 500 can qualify with a down payment of 10% or more.
Regardless of how much you put down, you’ll have to pay an upfront mortgage insurance premium and an annual premium if you take out an FHA loan. The upfront MIP is 1.75% of the loan amount, and the annual MIP ranges from 0.15% to 0.75%, depending on your mortgage term (15 or 30 years) and down payment amount. You’ll always pay the annual MIP for 11 years, regardless of how much equity you build before then. If your down payment is less than 5%, you’ll usually have to pay the MIP for the life of the loan.
The FHA limits the mortgages it guarantees to 65% of the FHFA conforming limit. In 2024, the FHA limit for a one-unit home in a low-cost area is $472,030. The high-cost limit is $1,089,300.
FHA loans are available with 15- or 30-year fixed-rate terms and adjustable-rate terms of 1/1 to 10/10.
Pros and Cons of FHA Loans
Here’s what to like about FHA loans — and what might give you pause.
Pros
Easier to get than a conventional loan
Low down-payment requirement
Often has lower rate than a conventional loan
Borrower can receive third-party contribution up to 6% of price or appraised value toward closing costs
Cons
Must pay MIP, which can last for life of loan
Lower loan limits compared to conventional loans
For owner-occupied homes only
Eligibility Criteria
Less-stringent lending criteria make FHA loans a popular choice among first-time homebuyers.
Minimum down payment: 3.5% with 580 credit score; 10% with credit score of 500-579
Maximum debt-to-income ratio: 50%
Minimum credit score: 500
VA Loan
VA mortgage loans let eligible service members, past and present, buy a home with favorable terms. The loans were created by the original GI Bill, and they’re guaranteed by the U.S. Department of Veterans Affairs.
To be eligible, you must be an active-duty service member or a veteran with a discharge other than dishonorable. Certain spouses and other personnel may be eligible as well.
One of the many benefits of a VA loan is that you can buy a home with no money down. Despite buying with no down payment, you won’t have to pay mortgage insurance with a VA loan. And as long as you qualify for the amount you want to borrow and you aren’t already using your benefit, there are no loan limits like there are with conventional and FHA loans.
You can take out a VA loan through a VA-qualified lender. The lender, not the VA, sets such eligibility criteria as minimum credit score. The lender also decides what terms to offer, although it can’t increase an ARM more than once per year or more than 5% over the life of the loan.
Until recently, a buyer using a VA loan couldn’t be required to pay their real estate agent’s commission. That rule has been suspended, at least temporarily, to allow VA buyers to better compete in the marketplace. This change doesn’t affect a VA buyer’s ability to have the seller pay up to 4% of their closing costs — a significant benefit of using a VA loan.
One cost VA buyers do pay is a funding fee, which is calculated on the loan amount. The amount depends on your down payment amount, if any, and whether you’ve used your loan benefit before. A first-time user with 0% down pays 2.30%. That amount drops to 1.65% with a 5% down payment and 1.40% with a 10% down payment. You can roll the funding fee into your loan or pay it at closing.
VA loans have a VA-imposed maximum term of 30 years and 32 days. The VA allows lenders to offer adjustable rates with an initial adjustment of up to 2% and a lifetime cap of 5% or 6%, depending on the length of the fixed-rate period.
Pros and Cons of VA Loans
VA loans are usually the best choice for eligible individuals, but it’s a good idea to understand the downsides as well as the benefits before you decide.
Pros
Buy with no money down
Usually has better rates than conventional loans
Can have 4% of closing costs paid by seller, lender or other third party
Cons
Funding fee of up to 2.30% of loan amount — 3.60% for subsequent use of benefit
Buying with no money down increases risk of loan default
Vets with dishonorable discharge not eligible
Eligibility Criteria
Lenders set eligibility criteria, so there’s no specific set of lending standards. Veterans United, a major VA lender, requires the following:
Minimum down payment: 0%
Maximum debt-to-income ratio: 41% (recommended by VA)
Minimum credit score: 620
USDA Loan
The U.S. Department of Agriculture has several home loan programs, the more popular of which is the Single Family Housing Guaranteed Loan Program. It’s similar to the VA loan program in that the loans are guaranteed by the U.S. government, and they allow buyers to purchase safe, decent homes with no down payment. But USDA loans are specifically for low-income and modest-income buyers looking to purchase in areas designated “rural” by the USDA.
To be eligible, your income must be within 115% of the median household income in your area. In addition, you must be purchasing a home to use as your primary residence.
Interestingly, areas the USDA considers rural are often anything but. Eligible areas include communities that are adjacent to rural areas, even if the communities themselves are suburban in nature.
The USDA sets some credit standards for USDA loans, and it leaves others to lenders. You can get a USDA loan from any approved lender, but relatively few offer these loans compared to FHA and VA loans. If you take one out, you’ll pay an upfront guarantee fee of 1% of the loan amount, which you can roll into your mortgage loan. USDA loans also have an annual fee of 0.35%, paid monthly as part of your regular monthly mortgage payment.
All USDA loans have 30-year fixed-rate terms.
Pros and Cons of USDA Loans
Borrowers have several reasons for choosing a USDA loan — and a few for looking at other options.
Pros
Allows purchase with no money down
Available to qualified low-income borrowers
Can finance closing costs
Cons
Income limits
Limited to USDA-approved areas
Can be hard to find a lender that offers the loans
Eligibility Criteria
Here’s what you’ll need to qualify for a USDA guaranteed loan:
Minimum down payment: 0%
Maximum debt-to-income ratio: 41%
Minimum credit score: 640 for automated approval, 620 for manual
FAQ
What are the most common types of mortgage loans?
Conventional loans (conforming and nonconforming) and FHA, VA and USDA loans are the most common. Between fixed-rate loans and ARMs, fixed rates are more common.
What are the different types of mortgages?
Mortgage types include conventional loans, including jumbo loans, and government-backed loans like FHA, VA and USDA loans.
What are the four types of qualified mortgages?
The four types are general, temporary, small creditor and balloon-payment qualified mortgages. In addition to defining lending standards, these QM types determine what kind of institution can originate them.
What is the most common form of mortgage?
A 30-year fixed-rate conventional mortgage is the most common form.
Is an FHA loan better than a conventional loan?
An FHA loan might be better for buyers who'll have trouble qualifying for a conventional loan. Otherwise, conventional loans are usually better. Despite having slightly higher rates, they can be less expensive overall. Conventional-loan PMI can be canceled when the loan-to-value ratio reaches 78%, whereas FHA MIP lasts 11 years or for the life of the loan. FHA loans also have an upfront fee and an annual fee.
Which type of loan has the lowest interest rate?
VA and FHA loans often have the lowest rates. However, lenders set the rates, not the government-sponsored enterprises or government agencies backing the loans, so they vary from one to the next.
The information related to Chase jumbo loans was collected by GOBankingRates and has not been reviewed or provided by the issuer of these products. Product details may vary. Please see the issuer’s website for current information. GOBankingRates does not receive commission for these products.
This article originally appeared on GOBankingRates.com: Types of Mortgage Loans: What Homebuyers Need To Know
