Mortgage Loan Types

As a prospective homebuyer, understanding the different types of mortgage loans will empower you to make informed decisions when it’s time to commit. This guide outlines the essentials of mortgage loan types, their costs, and factors that influence qualification, helping you choose the best option for your financial goals.

Getting Started

 When discussing mortgage options with lenders, inquire about all available loan types, including FHA, USDA, VA, and conventional loans. Take note of the pros, cons, and overall costs associated with each type of loan you qualify for.

Key Considerations

• Understand Total Loan Costs: Evaluate not only the interest rates and one-time fees but also the ongoing fees, such as mortgage insurance, that are integrated into your monthly payments.

• Rate Shopping Period: You can obtain multiple pre-approvals from different lenders within a 45-day period without negatively impacting your credit score multiple times. Use this period to compare rates and fees.

For more on this process, refer to **"Mortgage Shopping 101."

Mortgage Loan Types

Fixed-Rate Mortgages

• Maintain the same interest rate throughout the loan term.

• Monthly payments are predictable, though they may fluctuate due to changes in property taxes and insurance.

• Best For: Buyers who value stability and plan to stay in their homes long-term.

Adjustable-Rate Mortgages (ARMs)

• Interest rates vary after an initial fixed-rate period (e.g., 5, 7, or 10 years).

• Offer lower initial rates but are subject to market fluctuations.

• ARMs have caps to protect against rapid rate changes.

• Best For: Buyers planning to sell or refinance before the adjustable period begins.

Conventional Loans

• Not government-insured; available in conforming and non-conforming sizes.

• Credit Score: At least 620.

• Down Payment: Typically as low as 3%.

• DTI Ratio: Up to 43%.

• Private Mortgage Insurance (PMI): Required if the down payment is less than 20%, costing 0.1% to 2% of the loan amount. PMI can be canceled once you reach 20% equity.

Jumbo Loans

• Loan amounts exceed conforming limits, typically for high-value properties.

• Credit Score: 700+.

• Down Payment: 10-20%.

• DTI Ratio: Up to 43%.

• Notes: More difficult to qualify for due to stricter requirements.

FHA Loans (Federal Housing Administration)

• Designed for first-time homebuyers and those with less-than-perfect credit.

• Credit Score: As low as 580 with 3.5% down, or 500 with 10% down.

• DTI Ratio: Up to 50%.

• Mortgage Insurance Premium (MIP): Includes 1.75% upfront and 0.45%-1.05% annually. MIP lasts for the loan’s life if the down payment is less than 10%.

USDA Loans (U.S. Department of Agriculture)

• Promote homeownership in rural and suburban areas.

• Credit Score: Typically 640+.

• Down Payment: None required.

• DTI Ratio: 41%.

• Guarantee Fees: 1% upfront and 0.35% annually, lasting the life of the loan.

• Eligibility: Property must be in a USDA-eligible rural area; income limits apply.

VA Loans (Department of Veterans Affairs)

• Available to eligible veterans, active-duty service members, and certain National Guard/Reserves members.

• Credit Score: Generally low to mid-600s.

• Down Payment: $0.

• DTI Ratio: Ideal at 41%, but guidelines may vary.

• Funding Fee: 0.5%-3.6%, waived for certain veterans.

• Notes: No mortgage insurance required, typically lower interest rates.

Loan Categories

Conforming Loans

• Meet Federal Housing Finance Agency (FHFA) criteria.

• Limits: $726,200 in most of the U.S.; up to $1,089,300 in high-cost areas (2023).

• Can be purchased by Fannie Mae or Freddie Mac.

Non-Conforming Loans

• Do not meet FHFA criteria.

• Includes jumbo and government-backed loans.

Here’s a Chart for a Quick Overview of the Loan Types