A guide to different types of mortgages

Buying a house is one of the biggest financial transactions a person makes in their life. The vast majority of homebuyers — 80% to be exact — finance this purchase with a mortgage.

Mortgages make buying a home more attainable for most people, but they aren’t without their own complexities. There are many different types of mortgage loans, each of which may be right for different buyers and buying scenarios. Understanding the basics of mortgages will help you navigate the homebuying process better and find the best terms for your purchase.

Common types of mortgage loans

While there are many types of mortgage loans available, most are not ones that the average buyer will use to buy a residential property. These are the most common types of mortgages.

Conventional loans

Like the name suggests, conventional loans are the most popular type of mortgage. Conventional loans are the best choice for most potential homebuyers. Since they’re the most common loans, they have the most flexible options as lenders can work directly with borrowers to find terms that work for all parties. The 30-year fixed rate mortgage remains the most popular for homebuyers, but lenders offer both fixed-rate and adjustable-rate mortgages with different terms.

Some lenders offer conventional loans for a down payment of as little as 3%, so long as you have a strong credit score and a suitable debt-to-income ratio (DTI). The trade off, however, is that the lower your down payment, the higher your interest rate is likely to be.

Conventional loans may be conforming or non-conforming. Conforming loans “conform” to conventional loan standards established by the Federal Housing Finance Agency (FHFA), which include guidelines on credit, debt, and loan size. Loan products that meet these standards may be purchased by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that represent most of the American mortgage market. In 2024, the conforming loan limit was set at $766,550.

Jumbo loans

These loans are simply non-conforming conventional loans with a higher loan amount than the FHFA’s conforming loan limit. In 2024, that’s a loan over $766,550, or $1,149,825 in very expensive areas.

Since they are non-conforming, they may not be purchased by Fannie Mae and Freddie Mac, making them riskier for lenders. As such, borrowers may have to meet more stringent qualification requirements, like a credit score over 800 or a very high monthly income. With home prices in some areas, however, you may have no choice but to get a jumbo loan.

Learn more about jumbo loans.

Government-backed loans

Despite the US government sponsoring Fannie Mae and Freddie Mac, it is not a mortgage lender. However, it does help make homeownership more accessible with a few special mortgage products.

• FHA loans: These loans are insured by the Federal Housing Administration (FHA), reducing the risk that lenders incur by loaning to less qualified applicants. Borrowers need a minimum credit score of 580 with a 3.5% down payment or just 500 with a 10% down payment. FHA loans require mortgage insurance premiums, which raises borrowers’ monthly costs, and have lower limits than conventional loans which vary by location.
• VA loans: These loans are guaranteed by the US Department of Veterans Affairs (VA), meaning that if a borrower defaults on the loan, it will be paid back by the VA. VA loans are only for members of the US military and surviving spouses. They have excellent perks, including no minimum down payment, mortgage insurance or credit score requirement, and funding fees as low as 1.25%.
• USDA loans: These loans are guaranteed by the US Department of Agriculture (USDA) and geared towards helping moderate- to low-income borrows buy homes in rural areas. You must buy a home in a USDA-eligible area, but these loans have no credit score or down payment requirement.

These loans are reserved for those who cannot meet the qualification requirements for conventional loans. They tend to target specific demographics and support homebuying dreams for those who may not otherwise be able to achieve them.

What type of loan should I get?

The type of loan you should get depends on your specific financial circumstances and the home you’re interested in buying. Most Americans don’t qualify for government-backed loans, but if you’re a veteran or buying a home in a rural area, it’s worth exploring government-backed loan options.

If you’re buying an expensive home and can’t muster a high enough down payment, you may have to get a jumbo loan.

Mortgages typically come with fixed-rate or adjustable-rate terms. These refer to the interest rate that you’ll pay on the mortgage for the life of the loan.

Fixed-rate mortgages maintain the same interest rate during the entire life of the loan, so your loan principal and interest amount always stay the same. (Although your monthly payment may change due to escrow changes like property tax or homeowner’s insurance increases.) 30-year fixed-rate mortgages are the most common in the US, but you can also get a 15-year fixed-rate mortgage.

Adjustable-rate mortgages (ARMs), on the other hand, have interest rates that change over time. Usually, you’ll get a lower, fixed introductory rate for a period of time before the interest rate goes up or down depending on market conditions. For example, a ⅚ ARM has a fixed rate for five years, then the interest rate adjusts every six months depending on market conditions. These can be very valuable for homebuyers when national interest rates are high, but if interest rates increase during the fixed-rate period, it’s important to refinance into a fixed-rate mortgage before you’re stuck with a steep rate hike.

Other types of mortgages

There are many other types of mortgages, but not all are all that important for the average buyer to know.

Construction loans

People who build their own homes often use a regular mortgage to finance the purchase of land, but you can’t use a mortgage for construction costs. Rather, you can use a construction-to-permanent loan which begins as a construction loan and converts to a traditional mortgage when you move into the house. They’re short-term loans that may require a high down payment, but they can be good assets for those with some capital to build their dream house.

Learn about FHA construction loans.

Second mortgages

When you’ve owned your home for a while and built up some equity, you can take out a second mortgage loan. Second mortgages are loans borrowed against the equity you’ve accrued.

The most common types of second mortgages are home equity loans and home equity lines of credit (HELOCs). Both of these loan types are valuable for homeowners who want to finance home improvements or repairs, but they may also be used to consolidate other debts and get a cash infusion out of the investment you’ve already made in your home.

Reverse mortgages

A reverse mortgage loan allows homeowners to borrow money using their home as collateral. The title to the home remains in your name, but you won’t make monthly mortgage payments on the loan until after you’ve moved out of the home. (Although you will still pay property taxes and homeowners’ insurance.) Each month that you don’t pay the loan back, interest and fees increase the loan balance.

If you have a lot of equity in your home or own it outright, a reverse mortgage is a good way to gain some liquidity, especially if you know you plan to sell your home soon and will be able to pay the reverse mortgage back quickly.

Assumable mortgage

An assumable mortgage is a type of home loan that allows a buyer to take over the existing mortgage on a property from the seller. In this scenario, the buyer assumes responsibility for the outstanding balance, terms, and conditions of the seller's mortgage rather than obtaining a new loan.

Learn more about assumable mortgages.

FAQs

How do I get a mortgage?

The mortgage process varies a little based on the type of mortgage you’re pursuing and your lender. However, generally it plays out like this:

1. Get pre-approved for a mortgage before you start shopping for homes to understand roughly what you can afford.
2. Find a home you like and make an offer.
3. If the offer is accepted, you’ll begin the formal mortgage application and identify a loan product that works for you. 
4. Submit tax and financial documentation to verify that you qualify for the loan.
5. If you’re approved, the mortgage underwriting process begins, which typically takes about 30 days.

What are conforming vs non-conforming loans?

Non-conforming loans do not comply with the FHA’s financial standards, mostly due to the size of the loan. These loans may not be purchased by GSEs. Just because a loan is non-conforming doesn’t mean that it is unreliable or a bad deal.

What is Fannie Mae?

Fannie Mae, like its partner organization Freddie Mac, is a government-sponsored enterprise that buys mortgages from lenders. This frees up lenders’ money to make more loans and ensures that affordable mortgages remain available to homebuyers across the country.