Different types of mortgage loans explained

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When it comes to mortgages, there’s a model out there for virtually every borrower. Choosing the right type of mortgage loan depends heavily on your finances, goals, current mortgage rates and a host of other factors that can move the needle toward a specific loan type.

5 major types of mortgage loans

Here are the main types of home loans you can use to buy a home or refinance an existing mortgage.

• Conventional home loans: Best for borrowers with good credit and a solid employment history and income.
• Government-backed home loans: Best for borrowers with lower credit scores and cash saved for a down payment. Also ideal for military borrowers and buyers interested in rural areas.
• Jumbo home loans: Best for borrowers with strong credit scores, high incomes and a sizable down payment looking to buy a home in a high-cost area.
• Fixed-rate mortgages: Best for borrowers who want a stable, predictable mortgage payment over the loan’s lifetime.
• Adjustable-rate mortgages: Best for borrowers who don’t plan to stay put and want lower, fixed-rate payments in the initial years of homeownership but are OK with potentially paying more once the loan resets to a variable rate.

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Conventional home loans

A conventional mortgage is any home loan not backed by the federal government. Conventional mortgages are either conforming or non-conforming loans.

A “conforming” loan adheres to Federal Housing Finance Agency (FHFA) borrowing standards. These include rules for credit, debt-to-income ratio (DTI), loan amount and occupancy type. Most conforming loans are backed by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that buy and sell most U.S. mortgages on the secondary market.

Meanwhile, a “non-conforming loan” doesn’t meet FHFA guidelines—usually because it’s a jumbo loan that exceeds conforming loan limits or there’s insufficient credit to qualify. Because banks can’t sell these loans to the GSEs, non-conforming loans are considered a riskier bet.

Who it’s best for: Conventional loans are ideal for borrowers with higher credit scores, a stable employment and income history and manageable debt levels.

Conventional loan requirements

• Minimum credit score: 620 or higher.
• Maximum DTI ratio: 43% in most cases, but can go up to 50% for some borrowers.
• Minimum down payment: 3% to 5%, depending on the program.
• Notable fees: Requires private mortgage insurance (PMI) if you put less than 20% down.

Pros of conventional loans

• Offered widely by most lenders.
• Requires just 3% to 5% down.
• Can be used to buy a primary home, second/vacation home or an investment property.

Cons of conventional loans

• Requires a higher credit score than other loan types.
• Must pay private mortgage insurance (PMI) with less than 20% down.
• May be harder to qualify for than government-backed loans.

Government-backed home loans

Government-backed mortgages are guaranteed or insured by government agencies, including Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans.

FHA loans

These loans are insured by the FHA but offered by private lenders approved by the government agency—meaning the lenders have less risk in the event that a borrower defaults on what they owe. FHA loans offer flexible borrowing guidelines such as lower credit score requirements, more generous DTI ratio maximums and a low down payment.

Learn more: FHA loans vs. conventional home loans.

However, FHA loans also require mandatory mortgage insurance premiums and can often be more costly in the long run than conventional loans, particularly for homebuyers with good to excellent credit

Who it’s best for: Borrowers with little cash savings for a down payment and less-than-stellar credit.

FHA loan requirements

• Minimum credit score: 500 (with 10% down); 580 (with 3.5% down).
• Maximum DTI ratio: 43% in most cases, but can go up to 50%.
• Minimum down payment: 3.5% with a 580 credit score; 10% with a 500 credit score.
• Notable fees: Upfront and annual mortgage insurance premiums (MIPs) for the life of the loan.

Pros of FHA loans

• Lower credit score requirement.
• Low down payment of 3.5%.
• Can be combined with down payment assistance programs to help pay your down payment and closing costs.

Cons of FHA loans

• Requires upfront and annual MIP.
• Typically has lower loan limits than conventional loans.
• May have a slightly higher annual percentage rate (APR) than conventional loans.

VA loans

VA loans are one of the best perks of U.S. military service, yet it is underused. Military borrowers with sufficient VA entitlement qualify for generous loan features, such as no down payment, no mortgage insurance requirement and no loan limits. VA entitlement is the amount the government is willing to repay (based on service and status) if you default on your loan.

Who it’s best for: Active-duty military service members of all military branches, veterans or eligible surviving spouses who can provide a Certificate of Eligibility (COE).

VA loan requirements

• Minimum credit score: Varies by lender, but is typically 600 or higher.
• Maximum DTI ratio: 41%.
• Minimum down payment: 0%.
• Notable fees: No MI, but there is a VA funding fee to offset program costs for taxpayers.

Pros of VA loans

• No down payment or mortgage insurance requirement in most cases.
• No loan limits for VA borrowers with full VA entitlement.
• Comes with competitive interest rates and loan terms.
• Lender fees are capped at 1% of the loan amount.

Cons of VA loans

• Available only to military borrowers.
• May take longer to close than other loan types.
• Requires a VA funding fee.

USDA loans

USDA loans enable homebuyers who have lower incomes to purchase homes in eligible rural areas to expand rural communities. The loans carry a federal guarantee from the USDA but, like FHA and VA loans, are offered by USDA-approved lenders. USDA loans typically require a higher credit score than other loan types and have income limits.

Who it’s best for: Lower-income borrowers who want to buy a home in a USDA-eligible rural area and meet the program’s income limits.

USDA loan requirements

• Minimum credit score: Varies by lender, but is typically 640 or higher.
• Maximum DTI ratio: 41%.
• Minimum down payment: 0%.
• Notable fees: An upfront and annual USDA guarantee fee to protect the lender if you default.

Pros of USDA loans

• Some USDA loans require 0% down.
• Helpful if you’re buying a rural property and land in an eligible area.

Cons of USDA loans

• Income limits of no more than 115% of the area median area income.
• Might not be available in all desired rural areas.

Jumbo home loans

A jumbo home loan is any mortgage that falls outside of conforming loan limits set by the FHFA. For 2024, loan limits are $766,550 in most of the U.S. and $1,149,825 in some high-cost areas. Jumbo loans are conventional mortgages because they’re not backed by the government. These loans usually have higher borrowing costs since they carry greater risk to lenders.

Jumbo loan requirements

• Minimum credit score: Varies by lender, but is typically 700 or higher.
• Maximum DTI ratio: Varies by lender, but is usually 43%.
• Minimum down payment: Varies by lender, but is usually 10% or more.

Pros of jumbo loans

• Provide more borrowing power for well-qualified borrowers in high-cost areas.
• Can purchase primary residences, vacation homes and rental properties.

Cons of jumbo loans

• Higher interest rates and closing costs.
• Requires a larger down payment and ample cash reserves.

Fixed-rate mortgages

A fixed-rate mortgage has the same mortgage rate for the life of the loan. This means the interest rate you agree to at closing is the same rate you’ll have, ensuring your monthly principal and interest payments remain the same. The most common fixed-rate terms are 15 and 30 years. A longer-term fixed mortgage results in a lower mortgage payment, but you’ll pay a higher rate and more overall interest than a shorter-term loan.

It’s worth noting that if your property taxes and homeowners insurance premiums are part of your total mortgage payment and those bills go up over time, so will your monthly payment.

Who it’s best for: Borrowers who plan to live in their home for a long time and prefer having a stable and predictable monthly mortgage payment.

Pros of fixed-rate mortgages

• Predictable and stable principal and interest payments for the life of your loan
• Easier to budget your ongoing housing expenses
• Stable mortgage rate even if market shifts push rates higher

Cons of fixed-rate mortgages

• Higher interest rate than an ARM’s intro rate
• May have more stringent credit requirements than an Adjustable-rate mortgages (ARM)
• Locked into the same rate even if interest rates move lower.

Adjustable-rate mortgages (ARMs)

An ARM is a loan with a fixed interest rate for an initial period (usually five, seven or 10 years). After the initial period ends, the ARM’s interest rate becomes variable and can go up or down depending on market conditions—and so can your monthly mortgage payments. ARMs are available on most loan types.

Who it’s best for: ARMs are ideal if you don’t plan to stay in your home beyond the introductory rate period or if you can refinance before the loan resets.

Pros of adjustable-rate mortgages

• Lower initial fixed rates.
• More affordable monthly payments during the first few years.
• Could pay less if interest rates go down after the loan resets.

Cons of adjustable-rate mortgages

• Unpredictable monthly payments after the ARM resets to a variable rate.
• Higher risk of default if you can’t afford higher monthly payments.
• Harder to budget for long-term housing expenses.

Other mortgage types to know about

• Construction loans: These mortgages help you finance a new home build with disbursements at each stage of construction. You can either pay off the loan in a lump sum or convert the loan to a conventional mortgage after your build is finished (known as a construction-to-permanent loan). Otherwise, you’ll have to get a new mortgage and pay a second set of closing costs and lender fees.
• Interest-only mortgages: If you don’t have sufficient income or credit, an interest-only loan can help you buy a home by paying only the interest portion of the loan for a limited time frame. These are risky, though, because you have to make a lump-sum principal payment at the end of the interest-only period.
• Balloon mortgages: Like interest-only loans, balloon mortgages have shorter terms and can help with short-term financing but are risky if you can’t make a large payment on the back end of the loan.
• Piggyback loans: Also called an 80/10/10 loan, a piggyback loan is a type of first-lien second mortgage that lets you borrow more money for your down payment rather than depleting your cash savings. However, these loans have higher interest rates and increase your overall debt load.
• Non-qualifying mortgages: Non-QM loans don’t meet the government’s rules for a qualified mortgage, including credit score, DTI ratio and documentation standards. These loans have higher interest rates, but are helpful for self-employed borrowers and others with non-traditional income.
• Portfolio loans: These are loans that lenders keep on their books and don’t sell to the GSEs, so they have more flexible borrowing guidelines. Not all lenders offer portfolio loans, though, so shop around.
• Reverse mortgages: Aimed at older homeowners, reverse mortgages allow seniors with sufficient home equity to tap a portion of it to supplement their income in retirement.
• Physician loans: As the name suggests, these are loans geared at new doctors and medical professionals with high future earning potential. These loans typically require no down payment or PMI.

How to choose the best mortgage type for you

When you’re shopping for a home loan, narrowing down the best mortgage type for you depends largely on your financial situation, appetite for risk and homeownership goals. Here are some key things to consider as you evaluate loan types:

Your finances

• Income: You need to show a consistent income sufficient enough to repay your mortgage and other recurring debts. Lenders typically look for two years of steady, verifiable income.
• Employment: Your job history factors into your ability to repay your mortgage and default risk. Generally, lenders look for two years of stable employment, but it’s still possible to get a mortgage with a shorter job history.
• Down payment: Your down payment amount is the amount of cash you put down as an upfront payment toward your home purchase. The more you put down, the more favorable interest rates and loan terms you’ll qualify for.
• Credit score and history: The higher your credit score, the lower interest rates you’ll typically qualify for. Lenders look at your credit score to see how mindful you are with credit usage and paying your debts on time.
• Debt-to-income ratio: Your DTI ratio measures how much of your gross monthly income goes toward your debt payments, including your new mortgage payment. A high DTI ratio signals to lenders that you’re at higher risk of default.

Loan features

• Term: A longer loan term will have higher rates, but lower monthly payments while shorter loan terms have lower interest rates but higher payments.
• Interest rate type: A fixed-rate mortgage provides stability and predictability in your principal and interest payments. An ARM offers a low intro rate for a few years but, after that period ends and the loan resets to a variable rate, your payments might go up or down with rate changes.

Loan costs

• Loan fees: Some mortgage types come with higher closing costs, interest rates or guarantee fees that add up.
• Prepayment penalty: Read the fine print to see if your lender charges an early payoff fee if you pay off your mortgage ahead of schedule.
• Mortgage insurance: If you put down less than 20% on a conventional loan, you’ll pay mortgage insurance. FHA loans require lifetime MI premiums, in addition to upfront MIP.

The takeaway

Choosing the best type of mortgage for your needs and financial situation is one of the most important steps in the homebuying process. Your loan type, interest rate and loan term will determine your monthly mortgage payment and likely be your largest monthly expense.

Shop around with multiple lenders for a home loan, and provide as much detail about your income, financial situation, credit, employment and homeownership goals to help your loan officer or mortgage broker match you with the right loan type for your needs.

Frequently asked questions

Read more

• America’s most popular mortgage term is the 30-year home loan.
• Planning to buy a home that exceeds the FHFA’s conforming loan limits? A jumbo mortgage is probably your best option.
• Some borrowers prefer 15-year mortgages to save on interest.
• If your credit has some dings, an FHA loan may be the way to go.
• Military members and veterans may be able to buy a home with no down payment by using a VA loan.
• If you’re buying in an eligible rural area, and fit the income criteria, a USDA loan could make homeownership possible.
• Those seeking a lower rate or different loan term should take a look at refi rates.
• While most borrowers prefer fixed-rate loans, adjustable-rate mortgages can be a good choice in specific situations.

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Deborah KearnsPersonal Finance Expert

Deborah Kearns is a freelance contributor to Fortune Recommends and an award-winning personal finance journalist and housing expert. You can find her bylines in The New York Times, MarketWatch, CNN, NerdWallet, The Associated Press and many other publications. Deborah lives outside of Denver, Colorado, with her husband, two kids and their rambunctious rescue pup.

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Ehab ZahriyehSenior Staff Editor

Ehab is a senior staff editor at Fortune Recommends. Ehab's passion is helping readers in making sound personal finance and small business decisions. Ehab has been an editor for over 15 years. Prior to Fortune, he led commerce content teams at Digital Trends, and Merriam-Webster. He also freelanced for various publications including PCMag and Men’s Health.

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