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Finding your dream home in a competitive housing market may seem like the ultimate prize, but it’s only part of the process. Once you start the home-buying process, you need to decide which type of mortgage works best for your financial situation. The most common type of mortgage is a conventional mortgage, but that doesn’t mean it’s the right choice for you.

Comparing different types of mortgage loans and prequalifying with several lenders can help you secure a lower rate and better terms. Keep reading to learn about the variety of mortgage loan options available to homeowners.

What is a mortgage?

A mortgage is a loan you take out to help fund the purchase of your home. You can get a loan from a bank, credit union, and other financial institutions.

Typically, you pay a lump sum upfront as a down payment, then borrow the remainder with a mortgage. Like other loans, mortgages have interest rates, a repayment term, and a minimum monthly payment.

When you apply for a mortgage, the lender will tell you the loan amount you qualify for. This directly impacts the type of home you can buy. Lenders look at factors like your credit history, existing debt, and income to determine how much you can borrow for a mortgage.

Before you start shopping for a mortgage, find out how much you need to save to buy a house.

5 Types of mortgage loans

Most first-time homebuyers know they need to get a mortgage to purchase a home, but not everyone is aware of how many types of mortgage loans are available to choose from.

Some mortgages have stricter loan requirements, including a high credit score and moderate income, while others will accept lower credit scores. Some lenders want to see a 20% down payment, while others will accept a low down payment of 3.5%.¹

By understanding the different types of mortgage loans, you can choose the best mortgage for your individual budget and needs.

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1. Conventional loans

A conventional mortgage loan is not part of any government program. It’s one of the most common types of mortgage, accounting for nearly 74% of new home sales in the U.S.²

Conventional mortgages can have a fixed or adjustable interest rate with a 30, 20, or 15-year term.

Conforming vs. non-conforming loans

There are two types of conventional mortgages: conforming and non-conforming. Conforming loans have rules set by Fannie Mae or Freddie Mac, which are government-sponsored agencies that buy mortgages from lenders and sell them to investors.

Conforming conventional loans have maximum borrowing limits ranging from $766,550 in some counties to $1,149,825 in higher cost-of-living counties.³

Individual lenders set loan limits and terms for non-conforming conventional mortgages instead of Fannie Mae or Freddie Mac. This means eligibility, pricing, and other features could be less strict but could also subject you to higher fees and riskier terms.

With non-conforming loans, the Consumer Financial Protection Bureau advises you to consult multiple lenders to shop around and ensure you truly understand the terms and requirements.³

Pros of conventional loans

  • Higher loan limits
  • Finance a primary residence, vacation home, or rental property
  • No private mortgage insurance (PMI) if you put at least 20% down³
  • Optional shorter repayment terms to help you save on interest

Cons of conventional loans

  • Borrowers with a credit score lower than 620 may not qualify⁴
  • Stricter eligibility requirements overall

Who should get a conventional loan?

Consider getting a conventional loan if you have good credit, a lower debt-to-income ratio (DTI), and can meet the minimum down payment requirements. Conventional mortgage loans are also an option if you’re looking to buy a second property or can afford to put more money down and want to avoid paying PMI.

2. Fixed-rate loans

A fixed-rate mortgage has the same interest rate for the duration of the repayment period. If you get a mortgage with a 5% fixed interest rate at a 30-year term, your rate will remain at 5% until the 30-year term ends.

If you sell your home or refinance in the meantime, you would be giving up the fixed mortgage rate.

Pros of fixed-rate loans

  • Protects you from rising interest rates
  • Mortgage payments are consistent
  • Easier to budget and plan your finances

Cons of fixed-rate loans

  • Interest rate may be higher than the market rate initially
  • You’ll have to go through the process of refinancing to lower your rate

Who should get a fixed-rate loan?

You should get a fixed-rate loan if you’re looking for more stability with your monthly mortgage payment. A fixed-rate mortgage makes it easier to budget for your house payment. Also, if interest rates are low, you can lock in a great rate and save yourself some money over time.

On the flip side, if your rates decrease once you have your fixed-rate mortgage, you may feel trapped with a higher APR than the market currently offers. You should be willing to take on this risk if you want a fixed-rate loan.

Make sure you understand how mortgage rates work so you can compare different mortgage loan types with confidence.

3. Adjustable-rate loans

An adjustable-rate mortgage (ARM) is a loan where the interest rate changes during the life of the loan. Initially, your rate may be lower than other types of mortgages, and this initial phase will last anywhere from one month to five years.⁵ Most ARMs have an adjustment period where your rate will change based on one of these schedules:

  • Monthly
  • Quarterly
  • Yearly
  • Three years
  • Five years

Your mortgage payment can vary more throughout your loan term.

Most lenders have rate caps so your interest rate doesn’t exceed a certain amount. Rate caps are based on an index that lenders follow, along with the rate terms. If the index rate goes up, your mortgage payment can increase, but if it goes down, your payment might decrease.

Pros of adjustable-rate loans

  • Possibly get a lower interest rate initially
  • Won’t be locked into a rate if the market and index rates go down

Cons of adjustable-rate loans

  • More complex to understand and manage than a fixed-rate loan
  • Mortgage payments could increase substantially
  • You could end up paying more than you borrowed, even if you make on-time payments every month

Who should get an adjustable-rate loan?

You should consider an adjustable-rate loan if you’re comfortable with your mortgage payment fluctuating over time. An adjustable-rate loan could seem appealing if you have some wiggle room in your budget and want to take advantage of potentially lower interest rates now or in the future. Just be mindful of the drawbacks.

4. Jumbo loans

Jumbo mortgage loans finance homes for larger amounts that exceed the Federal Housing Finance Agency. The current loan limit for conforming mortgages acquired by Freddie Mac and Fannie Mae is subject to change each year. The conforming loan limit is currently set at $766,550, but this can vary slightly by state or county.⁶ For counties with a higher cost of living, the FHFA set the maximum loan limit to $1,149,825.

Jumbo loans have stricter requirements, so you must have excellent credit and a lower debt-to-income ratio. You may also need to prove you have liquid assets and enough cash on hand to cover your payments for a few months. Jumbo mortgage loans can also have higher interest rates than conventional loans.

Pros of jumbo loans

  • Higher loan limits
  • Wide range of properties to consider

Cons of jumbo loans

  • Stricter credit and DTI requirements
  • Higher interest rates
  • Not guaranteed by Fannie Mae and Freddie Mac

Who should get a jumbo loan?

Consider a jumbo loan if you live in an area where home prices are much higher than the national average. With a jumbo loan, you can finance a home that costs more than $1 million if needed. Make sure you meet the credit and DTI requirements and have enough cash reserves to qualify for the mortgage.

5. Government-insured loans

A government-issued loan is a loan that a federal government agency backs. The lender is protected if the buyer cannot repay the loan. Government-backed loans also make it easier for homebuyers to qualify for a mortgage since they have more lenient requirements, including a lower down payment and lower credit scores.

Private lenders also offer these loans so that you can choose to get a government-issued loan from a bank, credit union, or mortgage lender. Three types of government-issued loans exist: FHA, VA, and USDA.

What is a FHA loan?

The Federal Housing Administration backs FHA loans. These loans are intended for borrowers with a limited credit history or low savings. You can qualify for a FHA loan with a credit score as low as 580 and put as little as 3.5% down on your home.1 You may still be able to qualify for a FHA mortgage with a credit score between 500 and 579, but you’ll need a down payment of at least 10%.¹

You can only use an FHA loan for your primary residence, so this is not a good option for vacation homes or investment properties. While FHA loans don’t require private mortgage insurance, they do require buyers to pay an upfront Mortgage Insurance Premium (MIP).⁷

Pros of FHA loans

  • Can qualify with a lower credit score than conventional mortgages
  • Minimum down payment as low as 3.5%
  • Low closing costs

Cons of FHA loans

  • Stricter property standards than conventional mortgages
  • Mortgage insurance premium is required

What is a VA loan?

The U.S. Department of Veteran Affairs backs VA loans. You must be an active-duty service member or a veteran to be eligible. Surviving spouses can also qualify. VA mortgage loans have low-interest rates, limited closing costs, and no down payment requirements.⁸ There are no loan limits, so long as the lender believes you can afford the amount you want to borrow.

There is also no PMI with a VA loan. You can get a VA home loan as many times as you like since it’s a lifetime benefit.

Sometimes, there is a program funding fee that represents a percentage of the total loan cost. However, Congress introduced a program that can help waive this if you meet certain qualifications.⁹

Pros of VA loans

  • Limited closing costs
  • No down payment requirements
  • No private mortgage insurance

Cons of VA loan

  • Must be an active-duty service member, veteran, or surviving spouse to qualify
  • Program funding fee
  • Can only purchase a primary residence

What is a USDA loan?

The United States Department of Agriculture backs USDA loans. To qualify, you must buy a home in a rural area. The USDA has a map of eligible regions as well as income limits which vary by state.

With a USDA loan, the home must be your primary residence, and there is no minimum credit score or down payment requirements. Interest rates vary depending on the private lender you choose. USDA loans are only offered at 30-year repayment terms. A USDA loan is an ideal mortgage option for people who want to live in a rural area but may struggle to meet the requirements for a conventional mortgage.

Pros of USDA loans

  • No minimum credit score
  • No down payment requirements

Cons of USDA loans

  • Can only be used for primary residence
  • Home must be in a rural area

Who should get a government-insured loan?

Government-insured loans are possible options for people looking to buy a home but who may not meet the requirements for other types of mortgages. For instance, first-time home buyers who haven’t saved a large down payment may benefit from a government-backed loan. Government-insured options allow for more lenient credit requirements and no money down.

What type of mortgage is right for you?

You have several options when it comes to choosing the type of homeownership loan you need. Narrow your choices by reviewing your financial situation and comparing the pros and cons of these mortgages. Ask questions like:

  • What is my credit score? Can I improve it?
  • How much am I able to put down?
  • Where do I want to buy a home?
  • What’s my budget?

Of course, choosing a type of mortgage is just one important aspect of the home-buying process. Before you jump into the housing market, find out if now is a good time to buy a house.

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Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

¹ Information from the FHA's, "FHA Loan Requirements," as of February 5, 2024: https://www.fha.com/fha_loan_requirements

² Information from the National Association of Home Builder's "Eye on Housing," as of February 5, 2024: https://eyeonhousing.org/2023/08/new-home-sales-increasingly-backed-by-fha-loans/

³ Information from the Consumer Financial Protection Bureau's "Conventional Loans," as of February 5, 2024: https://www.consumerfinance.gov/owning-a-home/loan-options/conventional-loans/

⁴ Information from the Fannie Mae's "Selling guide," accessed February 7, 2024: https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/1041363231/What-is-the-minimum-credit-score-requirement.htm

⁵ Information from the Consumer Financial Protection Bureau's "Adjustable-Rate Mortgages" as of February 5, 2024: https://files.consumerfinance.gov/f/documents/cfpb_charm_booklet.pdf

⁶ Information from the Federal Housing Finance Agency's, "FHFA Announces Confirming Loan Limit Values for 2024" as of February 5, 2024: https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Conforming-Loan-Limit-Values-for-2024.aspx

⁷ Information from the FHA's "FHA Loans and Mortgage Insurance Requirements" as of February 5, 2024. https://www.fha.com/fha_article?id=1373

⁸ Information from the U.S Department of Veterans Affairs, "VA Home Loans," as of February 5, 2024: https://www.benefits.va.gov/homeloans/

⁹ Information from the United State Department of Agriculture's, "Rural Development Single Family Housing Direct Loan Program," as of February 5, 2024: https://www.rd.usda.gov/sites/default/files/RD-DirectLimitMap.pdf.

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