Like snowflakes, no two home buyers are alike. And there are different types of mortgage loans to accommodate different types of buyers and home refinances.
But every mortgage option has its benefits and drawbacks. That’s why it’s important to find the best home loan for your unique situation.
To begin our journey through mortgage options, we’ll explain the difference between conforming and nonconforming loans and fixed-rate and adjustable-rate mortgages (ARMs). Then we’ll provide an overview of 11 common home loans, including conventional, jumbo and government-backed loans as well as loans you can take out after you’ve bought a home.
What Are Fixed-Rate vs. Adjustable-Rate Mortgages?
A fixed-rate mortgage has a fixed interest rate versus an adjustable-rate mortgage where a low introductory interest rate will be offered for a set period of time.
When you get a mortgage, you’ll likely want to know what your interest rate will be and how it will affect your monthly mortgage payment. While the interest rate that you’re initially offered will depend on the going market rate, your lender and your creditworthiness, whether the interest will change over the life of the loan is dependent on the loan you choose.
Most home buyers will choose between adjustable-rate mortgages and fixed-rate mortgages.
A fixed-rate mortgage charges a set or “fixed” interest rate that never changes over the life of the loan. Fixed-rate mortgage terms are usually 10 – 30 years long. You’ll make the same monthly mortgage payments, though the portion of your payments applied toward interest will be higher during the loan’s early years.
The most important terms to look out for on fixed-rate mortgages are the interest rates and loan terms (aka length). While paying off a house in 10 years is a great way to build equity quickly, your monthly mortgage payments will be higher than they would be with a 30-year mortgage, which could unnecessarily strain your budget.
Adjustable-rate mortgages (ARMs)
An ARM is typically a 30-year mortgage that offers a low introductory interest rate for a set period of time. After the intro period, the interest rate adjusts annually or semiannually based on the market interest rate and your mortgage terms.
ARMs typically feature two numbers. The first number represents the length of the introductory period, and the second number indicates how often the rate on your mortgage can change.
For example, if you have a 5/1 ARM, the interest rate will be fixed for the first 5 years. At the end of 5 years, the interest rate can adjust once a year for the rest of the loan’s term. A 7/6 ARM has a fixed rate for the first 7 years, followed by a rate adjustment every 6 months.
An ARM might be a good fit if you want to take advantage of low introductory rates and plan on selling or refinancing the home before the intro period ends. If the loan sounds interesting, go ahead and take a deeper dive into ARMs and how they work.
Conforming vs. Nonconforming Loans
Most mortgages fall into one of two categories: conforming loans and nonconforming loans.
Mortgages that meet the standards set by Fannie Mae and Freddie Mac are conforming loans.
Fannie Mae and Freddie Mac purchase loans that conform to their guidelines. They either keep them in their portfolios or package them with other mortgages to sell as mortgage bonds to investors.
Nonconforming loans do not conform to the guidelines set by Fannie Mae and Freddie Mac. The loans either exceed federal loan limits or are backed by government agencies or departments.
With the basics out of the way, let’s navigate some of the most common types of loans available today.
Conforming loans are a popular choice and are also known as conventional loans.
1. Conventional loans
Conventional loans (offered by banks, credit unions and online lenders) are the most common home loans in the U.S.
To qualify for a conforming loan, borrowers must meet strict requirements, including:
- A recommended down payment of 20%
- Private mortgage insurance (PMI) for down payments less than 20%
- A debt-to-income (DTI) ratio of 45% or less
- A minimum credit score of 620
- A verifiable source of stable income
Conforming loans must also meet certain requirements. For 2022, conforming loans cannot exceed the Federal Housing Finance Agency (FHFA) loan limits of $647,200 (or up to $970,800 in certain higher-cost areas)
The lender still has some flexibility with loan terms and interest, so there’s room to negotiate with your lender.
Conforming loans are usually a good fit for borrowers with a stable income, available cash for a solid down payment, good credit and a low DTI.
2. High-balance conventional loans
High-balance loans (sometimes referred to as super conforming loans) backed by Fannie Mae and Freddie Mac allow borrowers in certain higher-cost areas to obtain financing with limits that exceed the FHFA’s conforming loan maximums.
High-balance loans are only available in areas where housing costs are higher than average. To qualify for a high-balance loan, borrowers must meet the FHFA requirements that apply to other conforming loans.
Conforming loans are popular, but there are times when a conventional or conforming loan won’t work. When that’s the case, some borrowers turn to nonconforming loans.
3. Jumbo loans
When a borrower wants to buy an expensive house that exceeds the area’s FHFA conforming loan limit, they may need to take out a jumbo loan.
Jumbo loans usually require a DTI of 43% or less and may have higher income and credit requirements.
Because jumbo loans are not insured by the government or guaranteed by Fannie Mae or Freddie Mac, these loans are riskier for lenders, which is why they usually have stricter requirements to qualify.
4. Interest-only loans
An interest-only loan allows borrowers to make monthly interest-only payments for a set period of time. Once the period ends, you pay back both principal and interest (usually at an adjustable rate) until the entire balance is paid off.
Interest-only loans are convenient for borrowers who want lower payments during the early years of the loan and a more attractive interest rate than they would get with a comparable fixed-rate loan. Some drawbacks of interest-only loans are that you do not build equity until the interest-only period ends, and your interest rate may increase.
5. Balloon loans
A balloon loan has a large lump-sum payment at the end of the loan term. A balloon mortgage typically has lower monthly payments, but you’ll make up for them with a final, one-time payment that covers the entire loan balance.
Unlike a fixed-rate loan, which is a fully amortizing mortgage, balloon mortgages do not fully amortize over their terms. The loan term is shorter than the amortization schedule, which is why you’ll need to fork over a large payment at the end of the loan to close it out.
To qualify for a balloon mortgage, you’ll likely need excellent credit, a low DTI and a solid down payment.
Borrowers who are interested in lower monthly payments and plan to refinance or sell their homes before the final payment is due will often choose balloon mortgages.
Government-backed loans are also nonconforming mortgages. Because the federal government promises to cover the loans in case of defaults, lenders can offer the loans to borrowers who might not otherwise qualify.
Government-backed loans help make home ownership more affordable for low- to moderate-income home buyers, veterans and borrowers who want to buy land in rural areas.
Only lenders approved by the government agencies can issue government-backed loans. These loans must also meet certain guidelines, like minimum credit scores and DTI requirements.
6. Federal Housing Administration (FHA) loans
FHA loans can assist home buyers who may not have enough saved for a large down payment or have lower credit scores. To qualify for FHA loans, the borrower must use the home as their primary residence. To make a 10% down payment, borrowers must have a credit score of at least 500. If they have a credit score of 580, borrowers can put down 3.5%.
While FHA loans have some great perks, they come with costs other mortgages may not have. No matter how large your down payment is, all FHA loans require an upfront mortgage insurance premium (UFMIP) that is 1.75% of the loan amount and an annual premium based on your loan-to-value (LTV) ratio, which is how much money you borrow relative to the home’s value.
The FHA also offers a 203(k) mortgage that allows home buyers to finance an additional sum to make repairs and home improvements.
FHA loans can help you buy a home with 3.5% down. Conventional loans may require 20% down – or more in some cases.
FHA loans offer competitive interest rates even if your credit score is low. You can qualify for 10% down with a credit score that ranges from 500 to 579. Conforming loans usually require a minimum credit score of at least 620.
For 2022, the FHA single-family loan maximum is $420,680 in most areas.
Upfront and annual mortgage insurance premiums are mandatory for all FHA loans – even if you make a 20% down payment.
7. U.S. Department of Agriculture (USDA) loans
USDA loans are government loans backed by the U.S. Department of Agriculture. USDA loans offer the rare opportunity to buy a home with 0% down. But the loans are limited to home purchases in designated rural areas.
USDA loans do not have minimum credit requirements, but lenders typically require a DTI of 41% or less. Like FHA loans, USDA loans require buyers to occupy their homes as primary residences.
Qualified buyers can purchase property with 0% down.
USDA loans often come with low interest rates, which can help make homeownership more affordable.
You can only buy properties in areas the USDA defines as rural.
Even if you find a qualifying rural property, you may not qualify as a borrower if your income exceeds 150% of the median income for the area.
8. Department of Veterans Affairs (VA) loans
VA loans are available to veterans, active-duty service members and qualified surviving spouses. VA loans are unique because they allow borrowers to finance 100% of the home’s purchase price.
To qualify for a VA loan, you must submit a Certificate of Eligibility, a document that proves you meet the loan’s service requirements.
VA loans allow you to finance up to 100% of a home’s purchase price.
VA loans do not require mortgage insurance. However, you will pay a one-time, upfront funding fee that equals 1.4% – 3.6% of the loan amount.
VA loans offer higher maximum loan limits than FHA and USDA loans.
VA loans are only available to qualified veterans, active-duty service members and surviving spouses.
While VA loans do not have strict credit and income criteria, lenders usually expect a DTI of 41% or less.
We’ve covered different types of mortgages for purchasing a home. Now let’s talk about the home loans that are available for homeowners.
9. Second mortgages
Second mortgages are typically used to access cash by tapping into the equity in your home as collateral. The most common types of second mortgages are home equity loans and home equity lines of credit (HELOCs).
Homeowners typically apply for second mortgages when they have enough equity to take out a loan for home improvements, higher education expenses, medical expenses or big emergencies.
Second mortgages typically have lower interest rates than credit cards.
10. Reverse mortgages
A reverse mortgage is a loan for homeowners age 62 or older. Reverse mortgages allow homeowners to borrow money against the equity in their homes and defer payments until the house is sold or the homeowner moves or dies.
Reverse mortgages can be risky but may be helpful for homeowners with a lot of equity in their homes. Homeowners who want to stay in their homes and spend more in retirement may benefit from reverse mortgages if they do not intend to leave the house to any beneficiaries.
11. Bridge loans
Bridge loans are short-term loans that allow you to close on a new home before you sell your current home. If you need funds from the sale of your current home to buy a new home but the timelines don’t line up, a bridge loan could be the right solution.
To qualify for a bridge loan, you’ll need at least 20% equity in your home. Most lenders will require a low DTI and good credit (often 620 and higher).
Know Your Loan Options Before Buying Your Home
With so many loans to choose from, understanding your options before buying a house is essential. Each loan has its set of qualifying criteria, benefits – and drawbacks. Enlist the help of a mortgage professional to help familiarize yourself with all your loan options.
Fannie Mae. “Eligibility Matrix.” Retrieved June 2022 from https://singlefamily.fanniemae.com/media/20786/display
Federal Housing Finance Agency. “FHFA Announces Conforming Loan Limits for 2022.” Retrieved July 2022 from https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Conforming-Loan-Limits-for-2022.aspx
U.S. Department of Housing and Urban Development. “Section A. Borrower Eligibility Requirements.” Retrieved June 2022 from https://www.hud.gov/sites/documents/4155-1_4_SECA.PDF
U.S. Department of Housing and Urban Development. “Appendix 1.0 – Mortgage Insurance Premiums.” Retrieved June 2022 from https://www.hud.gov/sites/documents/15-01MLATCH.PDF
U.S. Department of Housing and Urban Development. “Maximum Mortgage Limits 2022.” Retrieved June 2022 from https://www.hud.gov/program_offices/housing/sfh/lender/origination/mortgage_limits
U.S. Department of Agriculture. “Rural Development Single Family Housing Guaranteed Loan Program.” Retrieved June 2022 from https://www.rd.usda.gov/sites/default/files/rd-grhlimitmap.pdf
U.S. Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved June 2022 https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf