When shopping for a home loan, it's easy to get overwhelmed by the lingo and types of mortgage products available to you. Learn more about the most common mortgages and see if you are eligible for any of the specialty mortgage types listed below.
- Conventional mortgages offer great rates & fees and the widest variety of terms.
- FHA loans can help less qualified borrowers become homeowners but at a steep cost.
- USDA and VA loans are great deals for those who qualify for them.
- Jumbo mortgages are available for expensive properties.
- Interest-only mortgages are generally a good idea only in very specific situations.
Terms & Rates
Within each type of mortgage, the length and rate type can vary.
The most common mortgage terms (meaning length) are 30-year and 15-year. However, some local credit unions offer terms as short as two years. The term of your mortgage equals how long it will take you to pay it off if you pay the exact minimum amount every month. A 15-year mortgage breaks your loan and interest payments into 180 equal payments. A 30-year mortgage equals out to 360 payments.
Regardless of which loan term you choose, as long as your mortgage doesn't include a prepayment penalty, you can choose to make additional principal payments to pay off your mortgage faster without refinancing.
Fixed vs. Adjustable Rate Mortgages
A fixed-rate mortgage is a mortgage where your interest rate is fixed for the entire term of your loan. If you close on a 30-year mortgage on Jan. 1, 2022, at an interest rate of 2.99%, and you never move, refinance, or make additional payments, then your interest rate is still 2.99% when you make your final payment on Jan. 1, 2052. A mortgage calculator can show you the impact of different rates on your monthly payment.
An Adjustable-Rate Mortgage (ARM) conversely has a rate that changes at set periods of time. The most common mortgage ARMs are 7/1 and 5/1, but technically any ARM term is possible. On a 7/1 ARM, the rate remains the same for the first seven years and is then adjusted every single year thereafter.
Adjustable rate mortgages became very popular prior to the subprime mortgage crisis because they offered lower initial payments, but then lead to a wave of foreclosures as the rates increased and made the mortgage payments unaffordable for thousands of Americans. ARMs are risky for most borrowers and are generally not a great choice unless they intend to pay off their mortgage or refinance before their rate adjusts.
Conventional mortgages are the most common mortgage type. They have generally stricter requirements than government-backed mortgages and are offered by the most lenders.
Who Are Conventional Mortgages Best for?
Conventional mortgages are best for well-qualified buyers who don't fall into a specific population to be eligible for special government-backed financing.
- Credit score of 620+
- At least 3% for a down payment (PMI will be required if putting less than 20% down)
- Verifiable income for 2+ years
- Debt-to-income ratio of 45% or less
Specific requirements may vary depending on the lender you use.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
Government-Backed Mortgage Programs
Over the years the government has created numerous special home buying programs to encourage rural development, to help revitalize low-income neighborhoods, and to help veterans become homeowners.
USDA loans were originally created to help provide mortgages in rural areas lacking development. They are a unique and extremely attractive option for those who qualify because they allow borrowers to put 0% down and do not require any form of private mortgage insurance (PMI).
Who are USDA Loans Best for?
USDA loans are best for anyone that can qualify for them.
- The property must be in an area designated as rural by the USDA.
- The borrower's household income has to meet eligibility limits.
- Debt-to-income ratio as high as 41%, with some exceptions.
- Credit score of 640+, with some exceptions.
Federal Housing Administration (FHA) loans are loans insured by the FHA, but issued by any FHA-approved lender. FHA loans differ from HUD loans, which only apply to unique circumstances like Section 184 loans for Native Americans. In general, FHA loans exist to help low-income borrowers buy homes and have more lax income, credit score, and down payment requirements. FHA loans tend to have higher interest rates and fees than conventional mortgages and require an upfront mortgage insurance premium equal to 1.75% of the loan amount as of 2021, in addition to an annual mortgage insurance premium.
Who are FHA Loans Best For?
FHA loans are best for individuals who can't qualify for other home loans because other options tend to be much cheaper upfront and over the life of the loan.
- Credit score as low as 500 with 10% down or as low as 580 with 3.5% down.
- Down payments as low as 3.5%
- Verifiable income for 2+ years
- Debt-to-income ratio of 43% or less
U.S. Department of Veterans Affairs (VA) loans similar to FHA loans are backed by the VA, with requirements from the VA, that are issued by VA approved lenders. They are similar to USDA loans in that they do not require a down payment or mortgage insurance. They offer competitive interest rates and have more lax requirements than conventional mortgages. Generally borrowers have to be veterans who have served for certain lengths of time or under specific circumstances.
Who are VA Loans Best For?
VA loans are best for anyone who can qualify for them.
- Borrowers must have a Certificate of Eligibility from the VA, which they can apply for here.
- No minimum credit score. Lender must deem borrower a satisfactory credit risk.
- Debt-to-income ratio of 41% or less
- Down payment as low as 0%
- Verifiable income for 2+ years with some exceptions.
Other Unique Mortgage Products
Jumbo mortgages are loans for amounts that exceed the limits on conventional mortgages set by the Federal Housing Finance Agency (FHFA) and are typically issued on luxury properties or in areas with exceptionally high housing costs.
Who Are Jumbo Mortgages Best For?
Jumbo Mortgages are best for well-qualified buyers buying expensive properties that don't qualify for conventional mortgages and don't have the cash or assets to buy a property outright. Collectively these borrowers are referred to as HENRYs (High Earners, Not Rich Yet).
- Credit score of 700+
- Down payment of at least 20%
- 2+ years of verifiable income history
- A debt-to-income ratio under 43%
Interest-only mortgages mean that borrowers only pay the interest portion of their loan for a set period of time. The borrower gains zero equity in the home during these payments and will either need to pay off the mortgage in a lump sum, or with significantly increased payments in the future depending on the terms of the loan.
Who Are Interest-Only Mortgages Best For?
Interest-only mortgages are best for individuals who currently have assets tied up that will become available soon, who receive significant periodic bonuses with which to pay down the principal or who can expect their income to increase significantly before the principal payments become due (such as a medical student about to graduate and who has a signed employment contract).
Interest-only mortgages are a niche specialty product with no set requirements. Expect to have to show substantial assets and/or documentation proving your future ability to meet the payments when they increase.
Should I Get an FHA Loan or a Conventional Loan?
A conventional loan is cheaper upfront and in the long term over an FHA loan, as long as you can be approved for a conventional loan.
Should I Get a VA Loan or a Conventional Loan?
If you are able to get a VA loan, you can pay better rates with lower fees and less money down, which makes it a better choice for most borrowers over a conventional loan.
How Much Money Should I Put Down?
If you have a large chunk of cash just sitting around, then putting 20% down will save you any mortgage insurance premiums and will make you a more qualified buyer, getting you the best rates. With current mortgage rates as low as they are, any cash over 20% down could most likely perform better in a retirement savings vehicle like an IRA, 401(k), or HSA and give you immediate tax savings.
The Bottom Line
Conventional, fixed-rate mortgages are the most popular home loan type for a reason: They offer the most competitive rates and fees and are easy to find. For people who can't qualify for a conventional mortgage, FHA loans, VA loans, and USDA loans can help lower-income buyers with fair or better credit to become homeowners. Additionally, VA loans and USDA loans have attractive terms and perks for those who qualify for them. Regardless of which loan type you end up choosing, be sure to calculate how a mortgage payment can fit into your overall budget and consider whether buying a home is the right choice for you.