What Are The Major Types of Mortgage Loans?

To help you find the right mortgage for your needs, here’s a guide to the five main types of mortgages.

Types of mortgage loans

There are five main types of home loans, each with its own benefits and features.

• Conventional loan: Ideal for borrowers with high credit scores
• Jumbo loan: Ideal for borrowers with good credit looking to purchase a more expensive home
• Government-backed loans: Ideal for borrowers with low credit scores and minimal down payment cash requirements
• Fixed rate mortgage: Ideal for borrowers who want predictable monthly payments over the life of their loan
• Variable rate mortgage: Ideal for borrowers who don’t plan to live in their home for the long term, want lower payments in the short term, or are comfortable with potentially having to make higher payments in the future.

1. Conventional loan

Conventional loans, the most popular type of mortgage, come in two varieties: conforming loans and nonconforming loans.

• conforming loan: Conforming loans “conform” to a set of standards from the Federal Housing Finance Agency (FHFA), including guidelines for credit, debt, and loan size. If a conventional loan meets these criteria, it becomes eligible for purchase by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that make up the bulk of the mortgage market.
• non-conforming loan: These loans do not meet one or more of FHFA’s criteria. One of the most common types of nonconforming loans is jumbo loans, or mortgages with an amount that exceeds the conforming loan limit. Nonconforming loans cannot be purchased by GSEs and are therefore riskier for lenders.

Advantages of conventional loans

• Available from most financial providers
• Can be used to finance a primary residence, second home or vacation home, investment or rental property
• Financing as low as 3% on qualifying fixed rate loans

Disadvantages of conventional loans

• Must have a credit score of at least 620 to qualify
• Lower threshold debt-to-income (DTI) ratio compared to other types of mortgages
• If your down payment is less than 20%, you will need to pay a premium for private mortgage insurance (PMI).

Who are conventional loans best for?

If you have a good credit score and can afford a large down payment, a conventional mortgage may be right for you.

“Conventional loans are flexible and suitable for a wide range of homebuyers, especially those with good to excellent credit scores, steady income, and savings for a down payment,” said Churchill Senior Vice President Southeast President Matt Dunbar says: mortgage. “These loans offer competitive interest rates and flexible terms, making them attractive to buyers who meet our eligibility criteria.”

2. Jumbo loan

Jumbo mortgages are mortgages with amounts that exceed the FHFA conforming loan limits. In 2024, that means loans over $766,550, or $1,149,825 in high-cost areas. These are larger loans and may pose more risk since the GSEs cannot purchase them.

Advantages of jumbo loans

• Can provide funds to purchase more expensive homes
• Competitive interest rates, now comparable to conforming loans
• Often the only option in areas with high housing prices

Disadvantages of jumbo loans

• Not available at all financial institutions
• Higher credit score requirements (often a minimum of 700)
• Higher down payment requirements (often 10% to 20%)

Who are jumbo loans best for?

If you’re looking to finance a home for a purchase price that exceeds your current conforming loan limit, a jumbo loan may be the best route for you.

“These loans are perfect for buyers in high-priced real estate markets who need a lot of money,” Dunbar says. “Homebuyers considering jumbo loans typically have excellent credit, a low debt-to-income ratio, and significant equity.”

3. Government-backed loans

Although the U.S. government is not a mortgage lender, it does play a role in making homeownership available to more Americans by supporting three main types of mortgages:

• FHA loan: FHA loans, which are insured by the Federal Housing Administration (FHA), are available with a 3.5 percent down payment with a minimum credit score of 580 or a 10 percent down payment with a minimum score of 500. FHA loans also require you to pay mortgage insurance premiums, which increases costs. These premiums help FHA insure lenders against borrowers who default on their loans. Additionally, you can’t borrow as much money with an FHA loan. The limits are lower than with traditional conforming loans.
• VA loan: VA loans, guaranteed by the U.S. Department of Veterans Affairs (VA), are available to eligible members of the U.S. military (active, veterans, National Guard, and Reserves) and surviving spouses. There are no minimum down payment, mortgage insurance or credit score requirements, but you will be required to pay a financing fee ranging from 1.25% to 3.3% at closing.
• USDA loan: USDA loans, which are guaranteed by the United States Department of Agriculture (USDA), help moderate- to low-income borrowers purchase homes in rural USDA-covered areas. These loans have no credit score or down payment requirements, but there is a guarantee fee.

Advantages of government-backed loans

• More flexible credit and down payment guidelines
• Assisting borrowers who otherwise would not qualify

Disadvantages of government-backed loans

• Additional costs for FHA mortgage insurance, VA financing fees, and USDA guarantee fees.
• Limited to borrowers purchasing homes within FHA loan limits or in rural areas, or to military members.

Who are government-backed loans best for?

If your credit or down payment don’t allow you to qualify for a traditional loan, an FHA loan can be an attractive alternative. Similarly, if you’re buying a home in a rural area or qualify for a VA loan, these options may be easier to take advantage of.

“Government-backed loans are typically targeted to a specific demographic,” says Darren Tooley, senior loan officer at Cornerstone Financial Services. “For example, VA loans offer special financing available only to veterans, active duty military personnel, and eligible surviving spouses, while USDA loans specifically target homebuyers purchasing homes in designated rural areas. Additionally, FHA loans are a good alternative to conventional financing and can offer lower interest rates for those with below-average credit scores and smaller down payments.

4. Fixed rate mortgage

Fixed rate mortgages maintain the same interest rate for the life of the loan. This means your monthly mortgage payment (loan principal and interest) will always be the same. Fixed loan terms are typically 15 or 30 years, but some lenders offer flexible terms.

Advantages of fixed rate home loans

• Fixed monthly mortgage payment amount
• Makes it easier to budget

Disadvantages of fixed rate home loans

• Usually a higher interest rate than the introductory rate of a variable rate loan
• Need to refinance to lower interest rates

Who is a fixed rate home loan best suited for?

If you plan to stay in your home for a while and are looking for your monthly payments to remain the same (despite increases in homeowners insurance and property taxes), a fixed-rate mortgage may be right for you.

“Fixed-rate mortgages are ideal for people who want the peace of mind of knowing their annual interest rate and monthly payments, as they won’t change unless you refinance your loan,” says Tooley. says.

5. Adjustable Rate Mortgage (ARM)

In contrast to fixed-rate loans, the interest rate on adjustable-rate mortgages (ARMs) changes over time. Typically, lower fixed introductory rates apply for a period of time. After this period, the interest rate will change up or down at predetermined intervals for the remainder of the loan term. For example, a 5/6 ARM has a fixed interest rate for the first five years. Your interest rate then increases or decreases every six months based on your financial situation until you pay it off. When interest rates go up, your monthly mortgage payments will go up, and vice versa.

Advantages of ARM

• Lower introduction fee
• If prevailing interest rates fall, your payments may decrease over time.

Disadvantages of ARM

• Ongoing risk of higher monthly payments
• Changing rates make it difficult to plan your budget

Who is an adjustable rate mortgage best for?

If you don’t plan on living in your home for more than a few years, an ARM may save you money on interest payments. However, it is important to accept a certain level of risk that your payments may increase if you are still in your home.

“ARMs are suitable for buyers who plan to relocate or refinance before the end of the initial lock-in period, including professionals who relocate frequently, individuals who expect a significant increase in income, or That could include people who plan to sell their home in the next few years,” says Dunbar.

Other types of mortgages

In addition to these common types of mortgages, there are other types you may come across when considering a loan.

construction financing

If you want to build a house, you can’t finance it with a regular mortgage (because there’s nothing to back the loan with yet). However, construction loans are available, especially construction-to-permanent loans. This converts to a traditional mortgage once you actually move into your home. These short-term loans are ideal for people who can afford a higher down payment.

interest only mortgage

With an interest-only mortgage, the borrower makes interest-only payments for a specified period of time (usually five or seven years), and then pays both principal and interest. These loans are perfect for people who know they can sell or refinance, or who reasonably expect to be able to afford higher monthly payments later.

piggyback loan

A piggyback loan, also known as an 80/10/10 loan, involves two loans: 80 percent and 10 percent of the home’s value. A down payment is required for the remaining 10%. These loans are designed to help borrowers avoid paying mortgage insurance and taking out jumbo loans. However, this also means two sets of closing costs.

balloon mortgage

Balloon mortgages require larger payments at the end of the loan term. Payments are typically made based on a 30-year term, but only for a short period of time, such as 7 years. At the end of your loan term, you’ll end up paying a large amount on your outstanding balance, which can be difficult to pay if you’re not prepared.

portfolio loan

Most lenders sell the mortgages they provide to investors, but some lenders choose to hold the mortgages in their lending portfolio. So to speak, “on the books.” Because lenders hold these loans, they do not have to comply with FHFA or other standards and may have more relaxed eligibility requirements. However, higher fees may apply.

home renovation loan

If you want to purchase a home that requires major construction, you can also take advantage of a renovation loan. These loans combine the purchase and repair costs into one mortgage loan.

doctor loan

Physicians often carry large amounts of debt through medical school, so it can be difficult to qualify for a traditional mortgage, even if you have a well-paying practice or job. Take out a doctor loan: Targeted specifically for medical professionals (doctors, nurses, dentists, etc.), it takes into account your income, assets, credit history, and lack of debt.

non-conforming loan

Non-qualified mortgage (non-QM) loans offer less stringent credit and income requirements because they do not meet certain criteria set forth by federal law. While this may be attractive to borrowers with special circumstances such as unstable income, foreign income, or declared bankruptcy, these loans can also come with higher down payments and interest rates.

reverse mortgage

Reverse mortgages allow homeowners age 62 and older to borrow against the equity in a property and receive tax-free payments from the lender. No repayments are required until the property owner sells the home, moves away, or dies, at which point the proceeds from the sale of the home can be used to repay the reverse mortgage loan.

How to choose the type of home loan that’s right for you

Depending on your credit and financial situation, it may make sense to take out more than one type of mortgage. Similarly, you may be able to remove some loan types from your list right away. For example, if you or your spouse is not in the military, you cannot qualify for a VA loan.

When considering which type of mortgage to get, consider the following:

• Your credit score: What types of loans do you qualify for from a credit standpoint?
• down payment: Do you need a low-cost or no-down payment loan? What about down payment assistance? Would you like to use gift funds from family or friends? Are you a first-time homebuyer or have limited funds for a down payment? Consider government-backed loan options first.
• Your debt and income: Will my monthly income after debt repayment be enough to cover the mortgage? Be sure to factor in insurance, taxes, and PMI if your loan requires it.
• Appetite for risk: Do you want stable monthly payments? Can you afford higher monthly payments with an ARM? Many borrowers choose fixed-rate loans for more predictable payments.
• Your future plans: Are you planning on moving in the short term? Would you like to pay off your mortgage faster than 30 years? This may tell you if you can get an ARM, an interest-only mortgage, or other options.

Once you’ve considered these questions, start comparing mortgage lenders and speaking with a loan officer. They can help you identify the best mortgage and how to get that mortgage.

Additional reporting by Mia Taylor