This guide contains what to know about the top 13 types of mortgage loan you can get to buy a home for your family. All the different types of mortgage loans for first-time buyers are listed in this article.
When you’re planning to buy a home, you’ll have to choose the right kind of mortgage for you. This depends on how much money you want to borrow and how stable your financial situation is. See Mortgage Points.
If you don’t qualify for a certain type of mortgage, don’t worry! There might be another option that suits your needs better. After reading this guide, you will be able to choose the best type of mortgage loan for first-time home buyers.
Hybrid cloud Tech editorial team of experts is here to help you with your home-buying questions and provide unbiased product reviews. When evaluating mortgages, we consider various factors. It's important to note that in some cases, we may receive a commission from our partners, but rest assured, our opinions remain independent and unbiased.
- Depending on the amount you wish to borrow, you can opt for either a conforming or jumbo mortgage.
- If you don’t qualify for a conforming mortgage, don’t worry; you might still be eligible for other options like FHA, VA, or USDA mortgages.
- Another crucial decision is choosing between a fixed-rate mortgage and an adjustable-rate mortgage.
Each option has its benefits and drawbacks, and we’ll guide you through the process to make an informed choice. Stay updated on the latest news in the business world, with our daily newsletters.
13 Types of Mortgage Loans for Different Homes
- Conforming mortgage
- Jumbo mortgage
- FHA mortgage
- VA mortgage
- USDA mortgage
- Fixed-rate mortgage
- Adjustable-rate mortgage
- Construction loan
- Balloon mortgage
- Interest-only mortgage
- Piggyback loan
- Reverse mortgage
- Mortgage refinance
Now, we will explain them one after the other for a better understanding for anyone who wants to buy a home for living or rent.
1. Conforming Mortgage
A conforming mortgage is a type of conventional mortgage, which means it is not guaranteed or insured by a government agency like the FHA. Instead, it adheres to specific borrowing limits set by the Federal Housing Finance Agency (FHFA).
For the year 2023, the FHFA has set the conforming loan limit at $726,200 for most parts of the US. However, in areas with higher living costs, the limit can go up to $1,089,300.
To qualify for a conforming loan, most mortgage lenders typically require a credit score of at least 620 and a debt-to-income ratio between 36% to 50%. If your mortgage is backed by government-sponsored companies like Fannie Mae and Freddie Mac, you may need a minimum down payment of 3%. However, individual lenders may ask for a higher down payment.
If your down payment is less than 20% of the home’s value, you will likely be required to pay for private mortgage insurance (PMI). The cost of PMI usually falls within the range of 0.2% to 2% of your mortgage amount. The good news is that you can cancel PMI once you have built up at least 20% equity in your home.
2. Jumbo Mortgage
A jumbo mortgage, also known as a nonconforming mortgage, is another type of conventional loan. It is designed for borrowers who need to borrow an amount that exceeds the borrowing limits set by the Federal Housing Finance Agency (FHFA).
As mentioned earlier, the FHFA sets the borrowing limit at $726,200 in most parts of the US, with a higher ceiling of $1,089,300 in areas with higher living costs. If you require a loan amount that surpasses these limits, you would need to opt for a jumbo mortgage.
Because jumbo mortgages its and interest rate involve larger loan amounts, the eligibility requirements are more stringent compared to conforming mortgages. Lenders are taking on greater risk by lending more money, so they tend to require higher credit scores, lower debt-to-income ratios, and larger down payments from borrowers seeking jumbo loans.
Each lender may have its own specific criteria for nonconforming mortgages, so it’s essential to explore various options to find the best fit for your needs.
3. FHA Mortgage
There are three types of government-backed mortgages, which are home loans supported by federal agencies: FHA, VA, and USDA. The government backs these loans, meaning that if you have trouble repaying your mortgage, the agency will compensate the lender. This reduced risk for the lender makes these loans more accessible and affordable for borrowers like you.
Presently, an FHA mortgage is insured by the Federal Housing Administration. If you qualify for an FHA loan, you can secure it with a down payment of just 3.5% if your credit score is 580 or higher. If your credit score is between 500 and 579, a higher down payment of 10% is required. Most FHA lenders prefer borrowers to have a debt-to-income ratio of 43% or lower.
With an FHA mortgage, you don’t have to pay for Private Mortgage Insurance (PMI), but you will be required to pay for a different type of mortgage insurance. Initially, you’ll pay 1.75% of your mortgage amount at closing, and then you’ll have an ongoing annual premium of 0.45% to 1.05% of your mortgage amount.
4. VA Mortgage
Going by explanation, a VA mortgage is a special type of government-backed mortgage guaranteed by the US Department of Veterans Affairs, and it’s exclusively available to military families. One of the significant advantages of VA mortgages is that they typically come with lower interest rates compared to conforming mortgages, and the best part is that you won’t need to make a down payment.
To qualify for a VA mortgage, you’ll generally need a credit score of at least 660 and a debt-to-income ratio of 41% or lower.
Unlike some other mortgages, you won’t have to pay for private mortgage insurance (PMI) with a VA loan. However, there is a funding fee, which helps support the VA loan program. The funding fee is either 2.3% of the loan amount for first-time VA loan users or 3.6% if you’ve used a VA loan before.
If you make a down payment, the funding fee will be lower. The VA funding fee is a one-time cost that can be rolled into the loan amount or paid upfront at closing.
5. USDA Mortgage
In United States, a USDA mortgage is a type of government-backed home loan supported by the US Department of Agriculture. It is specifically designed to assist low-to-middle-income families purchasing a home in rural or suburban areas. The eligibility for this loan depends on the income limits in the area where you plan to buy a home. The population restrictions can vary, with some counties having a limit of 20,000 and others 35,000.
Similar to VA mortgages, USDA mortgages offer lower interest rates and do not require a down payment, making homeownership more attainable for eligible borrowers. To qualify for a USDA mortgage, most lenders will look for a credit score of at least 640 and a debt-to-income ratio of 41% or lower.
Although you won’t need to pay for Private Mortgage Insurance (PMI), there is a mortgage insurance requirement for USDA loans. However, this insurance is usually more affordable compared to PMI or insurance on an FHA mortgage. Initially, you will pay 1% of your loan principal at closing, followed by an annual premium of 0.35% of your remaining principal.
6. Fixed-rate Mortgage
Normally, when it comes to choosing an interest rate for your mortgage, you’ll have two options: fixed-rate or adjustable-rate mortgages.
With a fixed-rate mortgage, your interest rate remains constant throughout the entire loan period. This means that no matter how much the general mortgage rates fluctuate over the years, your rate will stay the same. Whether you’re paying off your mortgage for 15, 20, or 30 years, you will always have the peace of mind of knowing your interest rate won’t change.
For some types of mortgages, like conforming mortgages, you have the flexibility to choose between a fixed or adjustable rate. However, for other types, like USDA mortgages, you may only have the option of a fixed rate. Regardless of the type, a fixed-rate mortgage offers stability and predictability in your mortgage payments over time.
7. Adjustable-rate Mortgage
An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate remains fixed for a certain initial period, typically ranging from 3 to 10 years. During this introductory period, your interest rate stays constant, providing you with predictable payments.
After the initial period ends, the interest rate adjusts periodically, often once a year, based on the current market conditions and an index specified in your loan agreement. This means that your rate can go up or down, depending on how the index fluctuates. For example, if you have a 5/1 ARM, the “5” indicates the initial fixed rate period of five years, and the “1” means the rate will adjust annually after that.
The advantage of an ARM is that it usually starts with a lower initial interest rate compared to a fixed-rate mortgage, which can make your initial payments more affordable. However, it’s essential to consider that the rate will adjust in the future, which could result in higher monthly payments if the market rates rise. As such, ARMs are best suited for borrowers who plan to sell or refinance their home before the initial fixed-rate period ends.
8. Construction Loan
If you’re planning to build a house and need financial assistance to cover the costs of permits, supplies, and labor, you’ll likely require a construction loan. Construction loans are typically short-term loans, usually lasting for one year, and they often have higher interest rates compared to standard mortgages. Once the construction is complete, you have the option to either pay off the loan entirely or refinance it into a traditional mortgage.
On the other hand, if you’re buying a home and intend to make significant renovations, a renovation loan is what you need. This type of loan allows you to borrow money specifically for the renovations and then roll that amount into your mortgage. This way, you can finance both the purchase of the home and the necessary upgrades in a single loan, making it more convenient and manageable.
9. Balloon Mortgage
A balloon mortgage is a type of loan where you make regular monthly payments, just like any other mortgage, for a specified initial period, often around five years. At the end of this period, you are required to pay off the remaining loan balance in one lump sum.
Balloon payment mortgages usually come with lower interest rates, which can be appealing to some borrowers. However, they are considered risky because you have to be prepared to make a significant payment at the end of the initial period. It’s crucial to have a well-thought-out plan in place to handle this balloon payment when it becomes due.
If you know you will be moving or refinancing before the balloon payment is due, a balloon mortgage may be a suitable option, as you can benefit from the lower interest rate without facing the lump sum payment later on. Similarly, if you expect a substantial influx of money within the initial period, you might consider a balloon mortgage. However, relying on such uncertain circumstances can be risky.
It’s important to note that balloon mortgages are less common and can be difficult to find since they carry risks for both the borrower and the lender. It’s essential to thoroughly understand the terms and implications of a balloon mortgage before committing to one.
10. Interest-only Mortgage
With an interest-only mortgage, you make monthly payments just like any other mortgage, but during a set period, usually around ten years, you only pay the interest charged by the lender, not the principal amount borrowed.
The advantage of an interest-only mortgage is that it offers lower monthly payments during the interest-only period, making it appealing to some borrowers. However, it’s essential to understand that once this period ends, you will start paying both the principal and interest, which can lead to higher monthly payments.
Interest-only mortgages often come with adjustable interest rates, meaning the rate can fluctuate from year to year based on market conditions. This adds an element of uncertainty to the monthly payment amounts.
It’s important to consider that during the interest-only period, you won’t be paying down the principal, which means you won’t be building equity in your home. Building equity is one of the key benefits of homeownership, so this is a significant trade-off to consider.
Eligibility requirements for interest-only mortgages can be more stringent compared to conforming mortgages. Lenders may require a higher credit score, lower debt-to-income ratio, and a larger down payment. Due to these factors and the risks involved, interest-only mortgages are not as common and may not be suitable for everyone’s financial situation. It is recommended that you carefully evaluate the terms and implications before choosing this type of mortgage.
11. Piggyback Loan
A piggyback loan involves getting two mortgages simultaneously, where one is more substantial (usually 80% of the purchase price) and acts as the primary loan. The second mortgage, which is smaller, “piggybacks” on the larger one and can take different forms, such as a home equity loan or a home equity line of credit (HELOC).
Among the various piggyback loan options, the 80-10-10 loan is quite common. With this type of loan, you secure an 80% first mortgage, a 10% second mortgage, and then provide a 10% cash down payment. Combining the second mortgage with your own down payment allows you to reach a total of 20% down payment, which helps you avoid the need for private mortgage insurance (PMI).
Try to avoiding PMI, so that you can save money on your monthly mortgage payments and make homeownership more affordable. Piggyback loans can be a useful strategy for borrowers who want to purchase a home but have not saved enough for a 20% down payment. The Piggyback Loan offers an alternative to PMI without the need for a large upfront down payment. However, it’s essential to carefully consider the terms and interest rates of both loans before proceeding with a piggyback loan.
12. Reverse Mortgage
A reverse mortgage is a specialized home loan available to individuals aged 62 or older. Unlike traditional mortgages used to buy a home (forward mortgages), a reverse mortgage is designed for homeowners who have already gained equity in their property over time and likely have paid off their existing mortgage.
First, with a forward mortgage, you make monthly payments to the lender, and the debt decreases over time as you pay off the loan. You may probably think of as a regular mortgage, right?
On the other hand, with a reverse mortgage, the lender pays you, and the money comes from the equity you’ve bought the home our built up in your house. Over time, your debt increases as the lender pays you, and the interest on the reverse mortgage accumulates.
The repayment of the reverse mortgage occurs when you eventually sell the home, move out, or pass away. At that point, the proceeds from the sale go to the lender to repay the debt from the reverse mortgage. Any additional money from the sale, after repaying the lender, goes to you if you’re living or to your estate if you’ve passed away.
If your heirs wish to keep the property, they can choose to pay off the reverse mortgage themselves. It’s essential to carefully consider the implications and eligibility criteria before opting for a reverse mortgage, as it’s a unique financial product designed for specific circumstances in retirement planning.
13. Mortgage Refinance
When you refinance your home, you essentially replace your existing mortgage with a new one. This home refinancing can be beneficial for several reasons, such as securing a lower interest rate, reducing your monthly payments, or eliminating the need for private mortgage insurance (PMI).
The refinancing process shares similarities with getting your initial mortgage, as the lender will still review your credit score and debt-to-income ratio. However, there’s a key difference: Instead of primarily considering your down payment, the lender will focus on the amount of equity you’ve built up in your home.
Equity is the difference between your home’s current value and the amount you owe on your mortgage. If you’ve paid down a significant portion of your mortgage or if your home has appreciated in value, you’ll likely have more equity. This equity can be used as a basis to determine your eligibility and interest rate for the new mortgage when refinancing.
I usually advise people to carefully assess your financial goals and the costs involved in refinancing before proceeding. Refinancing can offer significant advantages, but it’s crucial to ensure that the potential benefits outweigh any associated fees or expenses. Additionally, considering your long-term plans and financial objectives can help you determine if refinancing is the right decision for you.
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FAQs: Types of Mortgages Frequently Asked Questions
1. What is the most popular mortgage type?
Conventional mortgages are indeed the most widely used type of mortgage. In 2021, lenders originated over 9.5 million conventional loans, as reported by the Home Mortgage Disclosure Act data. (The data available in PDF download). On the other hand, there were over 2.5 million nonconventional mortgage originations in the same year, which includes all FHA, VA, and USDA mortgages combined.
Conventional mortgages are popular because they are not backed or insured by a government agency, offering more flexibility in terms of eligibility criteria and loan options. Borrowers with good credit and a stable financial history often find conventional mortgages attractive due to competitive interest rates and various loan terms available.
Nonconventional mortgages, such as FHA, VA, and USDA loans, are designed to help specific groups of borrowers, such as first-time homebuyers, veterans, and low-to-moderate-income individuals. These types of loans can be a great option for those who meet the eligibility requirements and may have more relaxed qualification criteria compared to conventional loans.
Ultimately, the choice between conventional and nonconventional mortgages depends on individual circumstances, financial goals, and eligibility criteria. It’s essential to explore all available options and carefully consider the pros and cons of each type of mortgage before making a decision.
2. What type of mortgage has the lowest rates?
VA mortgages often offer some of the lowest interest rates in the market, making them an attractive option for eligible veterans and active-duty service members. FHA mortgages also generally come with relatively low interest rates, and on occasion, their rates may dip below average VA mortgage rates.
However, borrowers with excellent credit scores, low debt-to-income ratios, and substantial down payments may be able to secure even better interest rates on a conventional mortgage. Conventional mortgages are not backed by a government agency, which means they may come with a broader range of interest rate options based on individual financial profiles.
Your credit score, debt-to-income ratio, and down payment amount significantly influence the interest rate you’re offered. A higher credit score and a lower debt-to-income ratio typically indicate less risk for the lender, which can lead to more favorable interest rates. Additionally, a larger down payment can also demonstrate financial stability, potentially resulting in better mortgage terms.
As a borrowers, try to shop around and compare mortgage offers from different lenders to find the best rates and terms that suit their specific financial situation. Additionally, understanding the long-term costs and benefits of each mortgage type can help borrowers make an informed decision that aligns with their financial goals and overall homeownership plans.
3. What type of mortgage is the easiest to get?
In general, FHA mortgages are considered more accessible and easier to qualify for compared to conventional mortgages. FHA loans are specifically designed to help borrowers with lower incomes or less-than-perfect credit histories achieve homeownership.
The eligibility criteria for FHA mortgages are more lenient, which can be beneficial for first-time homebuyers or those who may not meet the strict requirements of a conventional loan. Some of the advantages of an FHA mortgage include:
- Lower down payment: FHA loans often require a smaller down payment, which can be as low as 3.5% of the purchase price.
- Lower credit score requirements: Borrowers with lower credit scores, typically as low as 580, may still qualify for an FHA loan.
- More lenient debt-to-income ratio: FHA loans may allow a higher debt-to-income ratio, making it easier for borrowers with some existing debt.
- Assumable loans: FHA loans are assumable, meaning that if you sell your home, the new buyer can take over your FHA loan at the same terms, which can be an attractive feature in a rising interest rate environment.
However, we will advise you to remember that while FHA mortgages are more accessible, they still have specific criteria that borrowers must meet. It’s crucial to consider the long-term costs and benefits of each loan type and to compare all available options before making a decision that aligns with your financial situation and homeownership goals.
Editorial Note: The opinions, analyses, reviews, or recommendations expressed in this article are solely those of the author and do not reflect the views or endorsements of any card issuer. Please refer to our editorial standards for more information.
Please be aware that the offers mentioned in this article were accurate at the time of publication, but they are subject to change at any time. These offers may have been modified or may no longer be available. It's always a good idea to verify the current terms and availability with the respective financial institutions before making any financial decisions.
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