The 5 Main Types of Mortgage Loans

Choosing a home loan is a significant decision as it can affect your down payment, monthly payments, and equity in the home. There are various types of mortgage loans to choose from.

1. Conventional Mortgages

 Conventional home loans can be either fixed-rate or adjustable-rate. Terms of 10, 15, 20 and 30 years are common. A conventional loan can be either conforming (in which the loan meets industry standards for packaging loans into securities that can be traded on the stock market) or nonconforming (in which the loan does not meet industry standards for bundling into securities

As with all types of mortgage loans, the criteria for qualifying for a conventional loan vary by lender. Here are the general requirements for a conventional loan:

• Good credit
• A down payment of at least 3%
• A manageable debt-to-income ratio
• Private mortgage insurance (PMI) for loans with a down payment under 20%

2. Jumbo loans

Jumbo loans are loans that exceed the loan maximums set by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency because these loans exceed the maximums set by these agencies, these agencies cannot buy them from the loan originators. This means that the originator is taking a greater risk by lending an amount this large. Because of this increased risk, jumbo loans may have more strict qualifying criteria and/or higher interest rates.

3. FHA Loans

FHA loans are government-backed loans, in which the FHA (Federal Housing Administration) insures a portion of the loan. This program was designed to make homeownership accessible for buyers who don’t meet the requirements to qualify for a conventional loan. By insuring the loan against borrower default, the FHA enables lenders to offer down payments as low as 3.5%, with potentially lower closing costs and more flexible qualification requirements. Keep in mind that FHA loans require payment of mortgage insurance premiums.

4. VA Loans

VA loans are government-backed loans offered exclusively to military service members, veterans and surviving spouses as a benefit for their service. 

As with USDA loans, VA loans can be either:

• Direct, in which the VA lends directly to the borrower.
  
  
• Guaranteed, in which the VA secures the loan from a third-party lender.

VA loans offer lower interest rates, limited closing costs and the potential for qualified buyers to get a loan with zero down payment and no PMI. However, VA loans require payment of a VA Funding Fee.

5. USDA Loans

USDA loans are government-backed loans that encourage low-to-moderate-income buyers to consider homes in areas with lower population density. To promote the development of rural areas, the US Department of Agriculture (USDA) offers two USDA loan options:

• Direct loans, in which the USDA lends money to borrowers directly
• Guaranteed loans, in which the USDA secures loans from third-party lenders on behalf of borrowers.

The main benefit of USDA loans is the opportunity for qualified buyers to purchase a qualified home with zero down payment. However, USDA loans require an upfront Guarantee Fee as well as an annual fee, which is similar to a conventional loan’s PMI.