Learn about the 6 different types of mortgages – conventional, FHA, VA, USDA, jumbo, and adjustable-rate – their features, requirements, and pros and cons to help you choose the best option for financing your home purchase
6 different types of mortgages? – Conventional Mortgages
Conventional mortgages refer to any loan that follows the standards and guidelines set by government-sponsored entities Fannie Mae and Freddie Mac. These are the “standard” mortgages most lenders offer:
• They require minimum credit scores, down payments, and debt-to-income ratios
• Available in 15-year or 30-year fixed-rate term lengths
• Down payments as low as 3% for certain borrower situations
Conventional loans provide more flexibility in loan amounts compared to other programs. But they require private mortgage insurance (PMI) if the down payment is less than 20%.
6 different types of mortgages? – FHA Loans
FHA (Federal Housing Administration) loans are mortgages insured by the federal government, making lenders more willing to approve borrowers despite lower credit scores/savings. Key features include:
• Minimum credit scores of 500-580 depending on down payment
• Low 3.5% down payment required
• Upfront and annual mortgage insurance premium costs
• Expanded debt-to-income ratio flexibility
FHA mortgages enable lower-income borrowers and those with impaired credit to qualify for homeownership more easily. However, the mortgage insurance costs can add up over the long run.
6 different types of mortgages? – VA Loans
VA (U.S. Department of Veteran Affairs) loans are a hard-to-beat $0 down payment mortgage option for current and former military members and eligible surviving spouses. Other benefits include:
• No private mortgage insurance required (saving thousands)
• Competitive interest rates thanks to VA guarantees
• More flexible qualification criteria (income, credit, etc.)
• Option to finance the VA’s upfront funding fee into the loan
VA loans do cap allowable seller-paid closing costs and have other special requirements. But few mortgage types offer such generous and exclusive borrower incentives.
6 different types of mortgages? – USDA Loans
The USDA (U.S. Department of Agriculture) offers affordable low or no down payment mortgages for low-to-moderate income borrowers purchasing properties in qualifying rural and suburban areas. USDA loans feature:
• No down payment options with 100% financing
• Low mortgage insurance costs of just 0.35% annually
• Income limits based on location and family size
• Property condition must meet USDA standards
The location and income requirements create some eligibility hurdles. But the favorable rates and low mortgage insurance premiums increase buying power for eligible borrowers.
6 different types of mortgages? – Jumbo Mortgages
Jumbo mortgages exceed the loan amount limits set by Fannie Mae and Freddie Mac for conventional conforming mortgages. As such, they are issued by private lenders to borrowers purchasing higher-priced properties. Jumbo loan specifics can vary, but most require:
• A minimum credit score of 680-700
• A higher down payment (often 20%+)
• Stricter income and debt ratio requirements
• More substantial closing costs and fees
While more challenging to qualify for, jumbos allow you to finance luxury properties and loan amounts well beyond the typical limit (currently $726,200 for most areas).
6 different types of mortgages? – Adjustable Rate Mortgages (ARMs)
Among all mortgage types listed so far, the rates and terms are fixed for the duration of the loan. However, adjustable-rate mortgages (ARMs) offer an introductory interest rate that adjusts after the initial fixed period:
• Initial fixed rates of 5, 7, or 10 years are common
• Rates then adjust annually according to index rates plus a margin
• Generally have lower rates than 30-year fixed mortgages during the fixed period
• Introduce interest rate risk for the remaining adjustable period
ARMs can make sense if you plan on paying off or refinancing the mortgage before the adjustable period. But they carry added risk if rates increase and you remain in the home.
There are also specialty mortgage options like interest-only, construction loans, balloon mortgages, and more. The ideal mortgage depends on your unique goals, down payment, credit profile, and financial circumstances.
Speaking to multiple lenders about all your home loan options is wise to ensure you secure the best overall mortgage terms and rates available. Being an informed borrower makes all the difference when selecting the right mortgage.
