Types of Mortgage Loans | Bankrate (2024)

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Most of us need a mortgage to buy a home, but this type of loan isn’t one-size-fits-all. To help you find the right home loan for your needs, here’s our guide to the five main types of mortgages.

Types of home loans

• Conventional loan: Best for borrowers with good credit scores
• Jumbo loan: Best for borrowers with excellent credit looking to buy a more expensive home
• Government-backed loan: Best for borrowers who have lower credit scores and minimal cash for a down payment
• Fixed-rate mortgage: Best for borrowers who’d prefer a predictable, set monthly payment for the duration of the loan
• Adjustable-rate mortgage: Best for borrowers who aren’t planning to stay in the home for an extended period, prefer lower payments in the short term and are comfortable with possibly having to pay more in the future

1. Conventional loan

Conventional loans, the most popular type of mortgage, come in two flavors: conforming and non-conforming. Here’s what that means:

• Conforming loans: As the name implies, a conforming loan “conforms” to a set of standards put in place by the Federal Housing Finance Agency (FHFA), which includes guidelines around credit, debt and loan size. (For 2024, the conforming loan limit is $766,550 in most areas and $1,149,825 in higher-cost areas.) When a conventional loan meets FHFA standards, it’s eligible to be purchased by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that back much of the mortgage market. Fannie and Freddie buy loans from lenders so that lenders have more capital to create more mortgages for more borrowers.
• Non-conforming loans: These loans do not meet one or more of the FHFA’s standards. One of the most common types of non-conforming loan is a jumbo loan, a mortgage in an amount that exceeds the conforming loan limit. Non-conforming loans can’t be purchased by the GSEs, so they’re considered a riskier prospect for lenders.

2. Jumbo loan

Jumbo mortgages are home loans in an amount that surpasses FHFA’s conforming loan limits. In 2024, that means any loan over $766,550, or $1,149,825 in higher-cost areas.

3. Government-backed loan

The U.S. government isn’t a mortgage lender, but it does play a role in making homeownership accessible to more Americans by backing three main types of mortgages:

• FHA loans: Insured by the Federal Housing Administration (FHA), FHA loans can be had with a credit score as low as 580 and a 3.5 percent down payment, or a score as low as 500 with 10 percent down. While that’s certainly a benefit, FHA loans also require you to pay mortgage insurance premiums, adding to your costs. These premiums help the FHA insure lenders against borrowers who default.
  In addition, you can’t borrow as much money with an FHA loan; its ceiling is much lower than those on conventional conforming loans.
• VA loans: Guaranteed by the U.S. Department of Veterans Affairs (VA), VA loans are for eligible members of the U.S. military (active duty, veterans, National Guard and Reservists) as well as surviving spouses. There’s no minimum down payment, mortgage insurance or credit score requirement, but you’ll need to pay a funding fee ranging from 1.25 percent to 3.3 percent at closing.
• USDA loans: Guaranteed by the U.S. Department of Agriculture (USDA) loans help moderate- to low-income borrowers within certain income limits buy homes in rural, USDA-eligible areas. These loans don’t have a credit score or down payment requirement, but do charge guarantee fees.

Pros of government-backed loans

4. Fixed-rate mortgage

Fixed-rate mortgages maintain the same interest rate over the life of your loan, which means your monthly mortgage payment (the loan principal and interest) always stays the same. Fixed loans typically come in terms of 15 years or 30 years, although some lenders offer flexible term lengths.

5. Adjustable-rate mortgage (ARM)

In contrast to fixed-rate loans, adjustable-rate mortgages (ARMs) come with interest rates that change over time. Typically with an ARM, you’ll get a lower, fixed introductory rate for a set period. After this period, the rate changes, either up or down, at predetermined intervals, for the remainder of the loan term. A 5/6 ARM, for example, has a fixed rate for the first five years; the rate then increases or decreases based on economic conditions every six months until you pay it off. When your rate goes up, your monthly mortgage payment does as well, and vice versa.

Other types of home loans

In addition to these common kinds of mortgages, there are other types you may find when shopping around for a loan:

• If you want to build a home, a construction loan can be a good financing choice — especially a construction-to-permanent loan, which converts to a traditional mortgage once you move into the residence. These short-term loans are best for applicants who can provide a higher down payment and proof that they can afford the monthly payments.

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• With an interest-only mortgage, the borrower makes interest-only payments for a set period – usually five or seven years — followed by payments for both principal and interest.You won’t build equity as quickly with this loan, since you’re initially only paying back interest.

  These loans are best for those who know they can sell or refinance or who can reasonably expect to afford the higher monthly payment later.

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• A piggyback loan, also referred to as an 80/10/10 loan, involves two loans: one for 80 percent of the home price and another for 10 percent.You’ll make a down payment for the remaining 10 percent. These loan products are designed to help the borrower avoid paying for mortgage insurance, but also require two sets of closing costs.

  You’ll also accrue interest on two loans, making this unconventional arrangement best for those who’ll actually save money using it.

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• A balloon mortgage requires a large payment at the end of the loan term. Generally, you’ll make payments based on a 30-year term, but only for a short time, such as seven years.When the loan term ends, you’ll make a large payment on the outstanding balance, which can be unmanageable if you’re not prepared.

  These loans are best for those who have the stable financial resources needed to make a large balloon payment once the loan term ends.

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• While most lenders sell the loans they make to investors (more on that here), some choose to keep them in their portfolio, or “on the books.” Because the lender holds onto these loans, they don’t have to adhere to FHFA or other standards. As such, they might have more flexible requirements.

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• If you want to purchase a home that needs major work, you could use a renovation loan, such as an FHA 203(k) loan.These loans combine the costs of purchasing and renovation into one mortgage.

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• Because doctors often have large amounts of student loan debt, qualifying for a traditional mortgage can be hard, even with a good-paying job. Enter physician loans, which help doctors, nurses and other health professionals buy a home.

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• Colloquially known as “non-QM loans,” these mortgages don’t conform to certain standards set by the Consumer Financial Protection Bureau.Their lenders have more flexibility in setting terms and underwriting.

  While non-QM loans offer more lenient credit and income requirements, making them good for less-traditional borrowers, they also often come with higher down payments and interest rates, and potentially riskier conditions.

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How to choose the right type of mortgage loan for you

Choosing the right mortgage for you depends on your credit, finances and goals, as well as whether you meet other eligibility requirements. You can’t get a VA loan, for example, if you or your spouse haven’t served in the military. If you’re planning on buying a home only to sell it in three years, an ARM might help you save on interest. As you compare loan types, calculate your DTI ratio and check your credit score to know where you stand.