Types of mortgages
All mortgage types have the same purpose -- to help you finance a home -- but they differ significantly in their terms and requirements.
For instance, some mortgages are designed to help home buyers with low credit get approved, while others offer variable interest rates. Below are the most common types of mortgages you'll find.
Conventional mortgages
A conventional loan is a mortgage that's not backed by a government agency, such as the FHA, VA, or USDA. Instead, these loans typically stick to standards set by Freddie Mac and Fannie Mae (the government-sponsored entities that back most conventional loans). They have stricter requirements (such as a credit score of at least 620), but they're widely available, meaning you'll have options when choosing a mortgage lender.
The most common type of conventional mortgage is a conforming loan, which is simply a mortgage that stays within the purchase limits set by Fannie Mae for different housing markets. Conventional mortgages that do not adhere to these limits are called non-conforming loans (or jumbo loans).
If you're interested in a conventional loan, here are some important details to keep in mind.
- Minimum credit score of 620. Conventional mortgages are best for borrowers with fair or good credit. Because there's no government guarantee, qualifying requirements are stricter. You generally need a credit score of at least 620 to qualify, though higher scores are preferred.
- Down payment of 3% or more. Conventional loans require a down payment. While 3% is a common minimum, you may also see 10%. All or part can come from a down payment gift (depending on your circumstances).
- Private mortgage insurance (PMI) may be required. If you're paying less than 20% of the home's value upfront, your mortgage will come with PMI. This protects the lender in case of foreclosure.
- Conventional mortgages have different terms. You could choose a fixed-rate conventional mortgage or one with an adjustable rate, and you'll have a wide selection of repayment timelines, including 15 years, 20 years, or 30 years.
FHA mortgage
FHA loans are mortgages backed by the Federal Housing Administration (FHA). Because of the government guarantee, lenders are less strict on their requirements, which can help first-time home buyers or buyers with low credit. If that sounds like you, here are some key things you need to know about an FHA loan:
- Credit score of 580. FHA loans are ideal for home buyers with poor or fair credit, as FHA lenders typically require only a minimum 580 credit score (or 500 with a 10% down payment).
- Minimum 3.5% down payment. With a 580 credit score, you can buy a home with as little as 3.5% down. All of your down payment can come from a down payment gift.
- Mortgage insurance is required. There's an upfront fee of 1.75% and an annual fee based on loan term and the ratio of your loan amount relative to home value. In some cases, mortgage insurance premiums must be paid for the life of your loan.
VA mortgage
A VA loan is guaranteed by the Veterans Administration. Although there are some upfront fees, VA loans are typically easy to qualify for and designed to be affordable. For those home buyers who have a Certificate of Eligibility (COE) and are interested in a VA mortgage, here are some details that might help you with your decision.
- Only eligible veterans can apply. To be eligible, one of the following must be true:
- You served 90 consecutive days during wartime.
- You served 181 consecutive days during peacetime.
- You have six years of service in the National Guards or Reserves.
- You're the surviving spouse of a service member who died while in service or because of a service-related disability.
- No down payment required. While individual VA mortgage lenders can have their own down payment requirements, the VA as an agency doesn't set a minimum amount that buyers must have.
- No mortgage insurance is required. This is true regardless of your down payment.
- You'll pay an upfront funding fee. The fee varies depending on your down payment and whether you've already obtained a VA loan in the past. Some borrowers don't have to pay this, including those eligible for VA compensation for service-connected disabilities.
USDA mortgage
A USDA loan is guaranteed by the U.S. Department of Agriculture. USDA loans are designed for low-income home buyers who are purchasing homes in eligible rural areas. If that sounds like you, here are a few important things you should know about USDA loans.
- No down payment requirement. The USDA does not set a down payment requirement, though individual USDA lenders may have their own minimum.
- USDA borrowers must meet specific criteria. Borrowers and properties must meet eligibility criteria for a USDA loan, which include income limits, loans limits, and property type and location.
- USDA loans come with upfront and ongoing fees. The upfront funding fee is 1% of the loan amount, and the annual fee is 0.35% of the average scheduled unpaid principal balance.
Jumbo mortgage
A jumbo loan is a mortgage that exceeds the borrowing limits for typical conventional loans. The specific threshold at which a loan becomes "jumbo" varies by location and changes periodically. But for 2023, many single-family homes purchased above $726,200 will likely be categorized as "jumbo" (if you live in a high-cost area, a jumbo loan would be above $1,089,300).
For those home buyers purchasing homes above the limits set on a conforming mortgages, here's what you need to know about jumbo loans.
- Borrowers should expect stricter criteria. Jumbo loans are best for borrowers with excellent financial credentials, as many lenders require a credit score of at least 700 or higher.
- You may need more down payment. Some lenders allow you to take jumbo loans with just a 10% down payment, but many require 20% or more.
- Mortgage insurance required. For down payments below 20%, you'll pay PMI.
- Jumbo loan rates can be fixed or adjustable. You'll have a choice of loan terms, including 15-year or 30-year loans.
30-year fixed rate
A 30-year fixed-rate mortgage is a home loan you'll pay over 30 years. With a fixed-rate mortgage, your rate and payment remain the same for the entire repayment time. These loans are popular choices for first-time home buyers, as the 30-year term can spread out a massive purchase over a long period, helping you afford the monthly payments. If you'd like to apply for a 30-year mortgage, here's what you should know.
- Many types of mortgages offer 30-year terms. For example, conventional and jumbo mortgages, as well as the government-backed loans mentioned above (FHA, VA, and USDA).
- Mortgage interest might be more expensive. 30-year mortgage rates are usually higher than the rates on mortgages with shorter payoff timelines, such as 15 or 20 years.
- Lower monthly mortgage payment. Even if your 30-year loan has a higher interest rate than loans with shorter payoff times, your monthly mortgage payment will likely be smaller. That's because you're making payments for more time.
- You'll pay more interest. By stretching out your time to pay off your loan, your total interest costs increase. For perspective, you can use this tool to calculate mortgage interest and see how quickly interest adds up.
- Qualifying requirements vary by lender. Your eligibility for a loan and the rates you're offered depend on the type of 30-year fixed-rate loan. If you obtain a 30-year fixed-rate FHA loan, you'd be subject to the qualifying rules set by the FHA.
20-year mortgage
A 20-year mortgage is designed to be repaid within 20 years, as opposed to 15 years or 30 years. These mortgages aren't as popular as 30- or 15-year mortgages, but they can be a good middle ground for home buyers who can afford a higher mortgage payment and want to save on interest. Here are a few key things to know about 20-year mortgages.
- Monthly mortgage payments will be high. Your monthly payments are higher than on a 30-year loan but lower than on a 15-year loan. Shorter loan repayment periods lead to higher monthly payments.
- Potentially lower interest rate. 20-year mortgage rates are usually lower than the rates on loans with longer terms but higher than those with shorter payoff timelines.
- You can save on interest. Total interest costs are lower than on a 30-year loan but higher than on a 15-year loan. When you pay interest for a longer period, your total costs are higher.
15-year fixed rate
A 15-year fixed-rate loan is a mortgage you'll pay off over 15 years. These mortgages are ideal for home buyers who want to pay off their homes as soon as possible, even if it means a higher monthly mortgage payment. If that sounds like you, here are some key things to know about 15-year fixed-rate loans.
- Available through most mortgage programs. Both conventional and government-backed 15-year mortgages are available.
- Very competitive interest rates. 15-year mortgage rates are usually lower than the rates on loans with longer repayment terms.
- High monthly payments. Monthly payments are higher than on loans with longer payoff times. Since you're reducing the number of payments you make, each one is higher.
- You'll save the most on interest. You'll pay less interest than on a loan with a longer repayment period. When you pay interest for less time, total interest costs decline.
- Qualifying requirements vary by lender. You can get a 15-year conventional loan or government-backed loan. Qualifying requirements are determined by the option you chose. Because 15-year loans have higher monthly payments, they can be harder to qualify for.
Fact Checked
Eric McWhinnie