5 Types of Mortgage Loans for Home Buyers

Key Points

• The main types of mortgages are conventional loans, government-backed loans, jumbo loans, fixed-rate loans, and adjustable-rate loans.

• Other types of mortgages exist for different purposes, such as building or renovating a home or investing in property.

• The right mortgage for you depends on the strength of your credit score and your financial goals.

Most of us need a mortgage to buy a home, but this type of loan is not one-size-fits-all. Here's our guide to the five main mortgage types to help you find the right home loan for your needs.

Types of mortgage loans

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

• Conventional Loans: Best for borrowers with good credit scores

• Jumbo Loan: For borrowers with excellent credit who want to buy a more expensive home.

• Government-backed loans: Best for borrowers with low credit scores and minimal cash for a down payment

• Fixed Rate Mortgage: Best for borrowers who prefer a predictable, fixed monthly payment over the life of the loan.

• Adjustable Rate Mortgage: Best for borrowers who don't plan to stay in the home long-term, prefer lower payments in the short term, or are comfortable with the prospect of paying more in the future.

1. Conventional Debt

Conventional loans, the most popular type of mortgage, come in two types: conforming and non-conforming.

• Conforming Loans: A conforming loan conforms to a set of Federal Housing Finance Agency (FHFA) standards, including guidelines regarding credit, debt, and loan size. When a conventional loan meets these criteria, it can be purchased by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that operate much of the mortgage market.

• Non-conforming Loans: These loans do not meet one or more of the FHFA's criteria. One of the most common non-conforming loans is a jumbo loan, a mortgage for an amount exceeding the conforming loan limit. GSEs cannot buy bad loans, so they are considered risky for lenders.

Pros of conventional loans	Cons of conventional loans
Available from the majority of lenders	Need a credit score of at least 620 to qualify
It can finance primary residences, second or vacation homes,  and investment or rental properties.	Lower debt-to-income (DTI) ratio threshold compared to other types of mortgages
Can put down as little as 3% for a conforming, fixed-rate loan	Need to pay private mortgage insurance (PMI) premiums if putting less than 20% down

 

Who are conventional loans best for?

A conventional mortgage is the best option if you have a strong credit score and can afford a sizeable down payment. The 30-year fixed rate option is the most popular option for home buyers. Compare conventional loan rates.

2. Jumbo loan

Jumbo mortgages are home loans for an amount that exceeds the FHFA loan limit. In 2024, that means a debt of $766,550, or $1,149,825 more in high-cost areas. Because these are large loans that the GSEs cannot acquire, they can present more significant risk.

Pros of jumbo loans	Cons of jumbo loans
Can finance a more expensive home	Not available with every lender
Competitive interest rates, nowadays, are on par with those on conforming loans.	Higher credit score requirement, often a minimum of 700
Often, the only option in areas with high home values	Higher down payment requirement, usually 10% to 20%

 

Who are jumbo loans best for?

If you want to finance a home whose purchase price is higher than the latest loan limit, a jumbo loan is the best option. Compare jumbo loan rates.

3. Government-backed loans

The U.S. government is not a mortgage lender, but it plays a role in making home ownership accessible to more Americans through three main types of mortgages:

• FHA Loans: Insured by the Federal Housing Administration (FHA), FHA loans can be obtained with a credit score of less than 580 and a 3.5% down payment or a score of less than 500 with a 10% down payment. FHA loans also require you to pay a mortgage insurance premium, which increases your costs. These premiums help FHA insure borrowers against defaulting borrowers. Also, you can only take out a little money with an FHA loan. Its limit is much lower than conventional conforming loans.

• V.A. Loans: Guaranteed by the U.S. Department of Veterans Affairs (V.A.), V.A. loans are for eligible members of the U.S. military (active duty, veterans, national guard, and reservists) and surviving spouses. No minimum down payment, mortgage insurance, or credit score is required, but you'll pay a financing fee of 1.25% to 3.3% at closing.

• USDA Loans: Loans guaranteed by the U.S. Department of Agriculture (USDA) help low- and moderate-income borrowers purchase homes in USDA-eligible rural areas. These loans do not require a credit score or down payment but charge an underwriting fee.

Pros of government-backed loans

Cons of government-backed loans

Much more flexible credit and down payment guidelines

Additional costs for FHA mortgage insurance, VA funding fees, and USDA guarantee fees

Help borrowers who wouldn’t otherwise qualify

Limited to borrowers buying a home priced within FHA loan limits or in a rural area, or servicemembers

 

Who are government-backed loans best for?

If your credit or down payment prevents you from qualifying for a conventional loan, an FHA loan can be an attractive alternative. Likewise, if you're buying a home in a rural area or training for a VA loan, it may be easier to qualify for these options. Compare FHA loan rates and VA loan rates.

4. Fixed Rate Mortgages

Fixed-rate mortgages maintain the same interest rate for the life of your loan, meaning your monthly mortgage payment (principal and interest on the loan) always stays the same. Fixed loans typically have terms of 15 or 30 years, although some lenders offer flexible terms.

Pros of fixed-rate mortgages	Cons of fixed-rate mortgages
Fixed monthly mortgage payment	Interest rates are usually higher than introductory rates on adjustable-rate loans.
Easier to budget for	Need to refinance to get a lower rate

 

Who are fixed-rate mortgages best for?

If you plan to stay in your home for a while and are looking for the stability of monthly payments that won't change (despite increases in your homeowner's insurance premiums and property taxes), a fixed-rate mortgage may be right. It is correct. Compare current mortgage rates.

5. Adjustable Rate Mortgage (ARM)

Unlike fixed-rate loans, adjustable-rate mortgages (ARMs) have interest rates that change over time. Typically, with an ARM, you'll get a lower fixed introductory rate for a fixed term. After that period, the rate changes, 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 increases or decreases every six months based on economic conditions until you pay it off. When your rate goes up, so does your monthly mortgage payment, and vice versa.

Pros of ARMs	Cons of ARMs
Lower introductory rates	Ongoing risk of higher monthly payments
Could pay less over time if prevailing interest rates fall	Tougher to plan your budget as rate changes

 

Who are adjustable rate mortgages best for?

If you plan to stay in your home for a maximum of a few years, an ARM can help you save on interest payments. However, it's essential to be comfortable with some degree of risk that your payments will increase if you're still in the home. Compare ARM loan rates.

Other Types of Mortgage Loans

In addition to these common types of mortgages, there are other types you may encounter when searching for a loan:

Construction Loans

A construction loan can be a good financing option if you want to build a home, especially a permanent construction loan, which converts to a conventional mortgage after you move into your residence. These short-term loans are best for those who can afford a sizeable down payment.

Interest Only Mortgage

With an interest-only mortgage, the borrower makes interest-only payments over a fixed period (usually five or seven years), followed by both principal and interest payments. You won't build equity as quickly with this loan because you'll only pay interest initially. These loans are best for people who know they can sell or refinance or reasonably expect to be able to make higher monthly payments later.

Piggyback Loans

A consolidation loan, also known as an 80/10/10 loan, consists of two loans: one for 80% of the home's value and another for 10%. You'll make a down payment for the remaining 10%. These loan products are designed to help the borrower avoid paying mortgage insurance but also require two closing costs. You'll also accrue interest on two loans, making this unconventional deal perfect for those looking to save money by using it.

Balloon Mortgage

A balloon mortgage requires a large payment at the end of the loan term. Typically, you'll make payments based on a 30-year term, but only for shorter periods, such as seven years. At the end of the loan term, you'll make a large payment on the outstanding balance, which can become unmanageable if you're unprepared. These loans are best for those with stable financial resources to repay a large amount after the loan tenure ends.

Portfolio Loan

While most lenders sell their loans to investors (more on that here), some choose to keep them in their portfolio or "on the books." Because the lender holds these loans, they are not required to comply with FHFA or other standards. As such, they may have more relaxed qualification requirements.

Renewal Mortgage

You can use a renovation loan to buy a house that needs significant work. These loans combine purchase and renovation costs into a single mortgage.

Loans for Doctors

Because doctors often have large debts from medical school, qualifying for a conventional mortgage can be challenging, even with a well-paying job. Enter medical loans, which help doctors, nurses, and other healthcare professionals buy homes.

Unauthorized Loans

Non-qualified mortgages or non-QM loans do not meet specific criteria the Consumer Financial Protection Bureau sets, so they offer more relaxed credit and income requirements. This may attract borrowers with unique circumstances, such as irregular income. However, some non-QM loans have higher down payments and interest rates.

How to choose the right type of home loan for you

Depending on your credit and finances, more than one type of mortgage may make sense. Likewise, you can quickly cross certain types of debt off your list. For example, you can't get a VA loan if you or your spouse didn't serve in the military.

As you think about what type of mortgage to get, consider:

• Your Credit Score: What Kinds of Loans Are You Credit-Qualified For?

• Paying you off quickly: Do you need a low- or no-payment loan? How about down payment assistance? Will you use gift funds from family or friends?

• Your Debt and Income: After paying off the debt, is your monthly income enough to cover the mortgage?

• Your risk appetite: Do you need a stable monthly payment? Do you expect to make more money in the future?

• Your Plans: Do you plan to move anytime soon? Do you want to pay off your mortgage before 30 years?

Once you've weighed these questions, compare mortgage lenders and talk to a loan officer. They can help you identify the best option. Here, you will find more information on how to get a mortgage.