Most Common Types of Mortgage Loans

Home buying can be both exciting and intimidating. You must save for a downpayment, apply for preapproval, get your paperwork in order and then find a home. But before you start getting preapproval, it's important to understand the types of loans available to get the best fit for your needs. Below, we'll guide you through the types of mortgage loans with their pros and cons. 

5 Most Common Types of Mortgage Loans

Here are the five most common types of mortgage loans you'll find. 

1. Conventional Loans

A conventional loan is the most common type of loan. These loans aren't government-backed and have different qualification requirements. Conventional mortgage lenders will examine your income and debt and require proof through pay stubs, W-2s, bank statements, and tax returns. Generally, conventional loans have stricter qualification requirements than government-backed loans. 

Conforming Loans

Conforming loans meet the criteria set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs). In 2024, you can borrow up to $766,550 for a conforming loan. In certain high-cost areas like Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the limit is $1,149,825.

Non Conforming Loans

Nonconforming loans don't meet Fannie Mae and Freddie Mac’s criteria. Jumbo loans are a common example, as they exceed the maximum conforming limit. Other nonconforming loans include those for self-employed individuals, bank statement loans and interest-only mortgages. 

2. Government-Backed Loans

Government-backed loans are special government-backed loans designed to encourage homeownership in rural and low-income neighborhoods. They are designed to help veterans, low-income families, and rural residents buy homes. These loans can be FHA, VA, or USDA, each with its own criteria and target borrowers. 

FHA Loans

Federal Housing Administration (FHA) loans can be issued by any FHA-approved lender. FHA loans are designed to help low-income families and therefore have upper-income limits. 

FHA loans usually have more lax income, credit score, and down payment requirements than conventional loans. On the other hand, FHA loans tend to have higher interest rates and fees. You'll be required to pay an upfront mortgage insurance premium equal to 1.75% of the loan amount (as of 2024). You'll also need to pay a mortgage insurance premium (MIP). 

USDA Loans

U.S. Department of Agriculture (USDA) loans are designed to promote development in rural areas. If you plan to buy in a USDA-approved area, you could qualify with a 0% down payment and no private mortgage insurance (PMI).

To qualify for a USDA loan, your income must meet eligibility limits. You'll need a credit score of 620 or higher and usually a DTI of 41% or less, although some lenders may make an exception. You can find USDA-designated rural areas here. 

VA Loans

Veterans Affairs (VA) loans are one of the most attractive loan options if you're a veteran or active-duty service member. VA loans are issued by VA-approved lenders according to VA-mandated guidelines. 

There's no minimum down payment; you don't have to pay for mortgage insurance.  VA loans are known for competitive interest rates and more flexible qualification requirements than conventional mortgages. However, to qualify, you must get a certificate of eligibility for active service or meet other VA criteria. You can 

3. Fixed-Rate Mortgages

Fixed-rate mortgages have a fixed interest rate for the duration of the loan. This is the most common type of mortgage and can refer to either conventional or government-backed loans. Fixed loans usually have terms of 15 years or 30 years, although you could get a different length.

4. Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) are the opposite of fixed rates. With an ARM, interest rates change over time. You'll usually get a lower, fixed introductory rate for a period. After this period, the rate changes at predetermined intervals. 

For example, a 5/6 ARM means you'll get the introductory rate fixed for the first five years. After that, the rate changes every six months based on the market index rates your mortgage is tied to. If the interest rate increases, your mortgage payment will as well. 

5. Jumbo Mortgages

Jumbo mortgages, as the name implies, exceed conforming loan limits. In 2024, the FHFA’s conforming loan limits are $766,550, or $1,149,825 in higher-cost areas. These loans present more risk to lenders and borrowers but can allow you to purchase more costly homes. 

Other Types of Mortgage Loans

Here is an overview of the other types of mortgages to consider:

Balloon Mortgages

A balloon mortgage means you'll make a large payment at the end of the loan term. Usually, these mortgages are initially based on a 30-year term but could become due in a much shorter time, often seven years. That means you'll need to be prepared to repay the remainder of the mortgage after a (relatively) short time. 

Construction Loans

Construction loans allow you to build your own home. You could also get a construction-to-permanent loan, which converts to a traditional mortgage once you actually move into the residence. 

Interest-Only Mortgages

With an interest-only mortgage, as the name implies, you'll only pay interest (and not repay the principal) for a set period of time, usually five to seven years. The best interest-only mortgage lenders can help you to find a loan that fits your needs. These loans make sense for people who plan to move or expect significantly higher income within the interest-only time frame. 

Non-Qualifying Loans

Non-qualifying mortgages are available to borrowers who don't meet standard qualification requirements set by the Consumer Financial Protection Bureau. Lenders may have more lenient credit and income requirements. You can consider this loan if you're self-employed, a small-business owner, or have negative marks on your credit history.

Physician Loans

A physician's loan is specifically for doctors, nurses, dentists, and other medical professionals with large amounts of medical school debt. These loans make allowances for the lack of income and assets, credit history, and debt loads for medical professionals who may have spent longer in school. 

Piggyback Loans

A piggyback loan is actually two loans that can help you avoid private mortgage insurance or a jumbo loan. One loan is for 80% of the home price and another is for 10%. You'll have to pay 10% as a down payment. There’s a required down payment for the remaining 10%. The downside is that you'll have to pay closing costs on both loans. 

Portfolio Loans

Portfolio loans are offered to investors that don't have to meet conforming loan standards. They may have more lenient qualifications but also come with higher fees or interest rates. Instead of selling these loans, portfolio lenders hold them. 

Renovation Loans

If you're buying a home that needs major repairs, you could get a renovation loan. A renovation loan combines the cost of purchase plus (estimated) repairs in a single mortgage.

Getting the Right Mortgage For Your Family

There are flexible mortgage solutions for nearly every family. Low credit scores, down payment, or income shouldn't stop you from buying a home with some support. In addition, you can check out first-time homebuyer programs by state to see if you qualify for additional assistance. From construction loans and portfolio loans to government-backed loans, you have options!

Frequently Asked Questions