7 Types Of Home Loans For All Home Buyers
Hanna Kielar11-minute read
January 10, 2023
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*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.
As a prospective home buyer, it’s just as important to research types of mortgages as the neighborhoods you want to live in. Applying for a home loan can be complicated, and deciding which type of mortgage best suits your needs early on will help direct you to the type of home you can afford.
There are a number of loans to choose from when you buy a home, so it's important to fully understand the advantages and disadvantages of each type before you make a decision. Depending on the type of mortgage you choose, you’ll have different requirements that influence your rate, loan terms and your lender. Selecting the right mortgage for your situation can lower your down payment and decrease the overall interest payment over the life of the loan.
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Requirements To Get A Mortgage
To find the best mortgage for your prospective home, understand the types of loans you’re able to pursue. The factors below can influence the types of mortgages you’ll qualify for:
- Estimated down payment: The size of your down payment can impact the mortgage rate lenders will give.
- Monthly mortgage payment: Mortgage lenders will look at your income and assets to determine the total loan amount you can afford to pay back. When calculating your budget for your monthly mortgage payment, consider the principal amount, interest and taxes, mortgage insurance, utilities and any homeowner’s fees.
- Credit score: Your credit score will play a large role in determining the interest rate on your loan.
Types Of Home Loans
All types of mortgages are considered either conforming or non-conforming loans. Conforming versus non-conforming loans are determined by whether your lender keeps the loan and collects payments and interest on it or sells it to one of two real estate investment companies – Fannie Mae or Freddie Mac.
A conforming loan refers to a conventional mortgage that can be purchased by Fannie Mae or Freddie Mac. For one of these institutions to purchase the mortgage from your lender, the loan must meet basic qualifications set by the Federal Housing Finance Agency (FHFA). These loan requirements include the following:
- Below the maximum dollar limit: The maximum dollar limit in most parts of the contiguous United States is $726,200 in 2023. In Alaska, Hawaii and certain high-cost areas, the limit is $1,089,300. Higher limits also apply if you buy a multifamily unit. Your lender can’t sell your loan to Fannie or Freddie and you can’t get a conforming mortgage if your loan is more than the maximum amount, unless you qualify for a super conforming loan.
- Not a federally backed loan: The loan can’t already have backing from a federal government entity. Some government bodies (including the Department of Veterans Affairs and the Federal Housing Administration) offer insurance on home loans. If you have a government-backed loan, Fannie and Freddie may not buy your mortgage.
- Meets lender-specific criteria: Your loan must meet the lender’s specific criteria to qualify for a conforming mortgage. For example, you must have a credit score of at least 620 to qualify for a conforming loan. You may also need to take property guidelines and income limits into account when you apply for a conforming loan. A Home Loan Expert can help determine if you qualify based on your unique financial situation.
Conforming loans have well-defined guidelines and there’s less variation in who qualifies for a loan. Because the lender can sell the loan to Fannie or Freddie, conforming loans are also less risky. This means that you may be able to get a lower interest rate when you choose a conforming loan.
If your loan doesn’t meet conforming standards, it’s considered a non-conforming loan. Non-conforming loans have less strict guidelines than conforming loans. These loans can allow you to borrow with a lower credit score, take out a larger loan or get a loan with no money down.
You may even be able to get a non-conforming loan if you have a negative item on your credit report, like a bankruptcy. Most non-conforming loans will be government-backed loans or jumbo mortgages.
Find the best mortgage option for you.
Apply online for expert recommendations and to see what you qualify for.
Understanding Different Types Of Mortgages
Depending on the type of mortgage applicant you are, you’ll find various advantages and disadvantages of home loans. Whether you’re a first-time home buyer, are downsizing or refinancing, consider the type of applicant you are before choosing a mortgage type.
You should also consider how big your loan amount will be, as that will help you narrow down the financing option you’ll need to apply for. If you’re not sure, you can use a mortgage calculator to estimate the dollar amount you’ll need to borrow.
Conventional mortgages are the most common type of mortgage. That said, conventional loans do have stricter regulations on your credit score and your debt-to-income (DTI) ratio.
You can buy a home with as little as 3% down on a conventional mortgage. You’ll also need a minimum credit score of at least 620 to qualify for a conventional loan. You can skip buying private mortgage insurance (PMI) if you have a down payment of at least 20%.
However, a down payment of less than 20% means you’ll need to pay for PMI. Mortgage insurance rates are usually lower for conventional loans than other types of loans (like FHA loans).
Conventional loans are a good choice for most borrowers who want to take advantage of lower interest rates with a larger down payment. If you can’t provide at least 3% down and you’re eligible, you could consider a USDA loan or a VA loan.
Pros Of Conventional Mortgages:
- The overall borrowing cost after fees and interest tends to be lower than an unconventional loan.
- Your down payment can be as little as 3% for qualifying loans.
Cons Of Conventional Mortgages:
- You have to pay PMI if the down payment is less than 20%.
- Stricter qualifications that require a minimum credit score of 620 and low DTI.
Home Buyers Who Might Benefit:
- Borrowers with a stable income, who pay at least 3% down and have strong credit.
A fixed-rate mortgage has the same interest rate and principal/interest payment throughout the duration of the loan. The amount you pay per month may fluctuate due to changes in property tax and insurance rates, but for the most part, fixed-rate mortgages offer you a very predictable monthly payment.
A fixed-rate mortgage might be a better choice for you if you’re currently living in your “forever home.” A fixed interest rate gives you a better idea of how much you’ll pay each month for your mortgage payment, which can help you budget and plan for the long term.
You may want to avoid fixed-rate mortgages if interest rates in your area are high. Once you lock in, you’re stuck with your interest rate for the duration of your mortgage unless you refinance. If rates are high and you lock in, you could overpay thousands of dollars in interest. Speak to a local real estate agent or Home Loan Expert to learn more about how market interest rates are trending.
Pros Of Fixed-Rate Mortgages:
- Monthly payments don’t change over the life of your loan, making it easier to plan a budget.
Cons Of Fixed-Rate Mortgages:
- You may end up paying more in interest over time if the rates are high.
Home Buyers Who Might Benefit:
- Buyers that are purchasing or refinancing their forever home.
The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). ARMs are 30-year loans with interest rates that change depending on how market rates move.
You first agree to an introductory period of fixed interest when you sign onto an ARM. Your introductory period is typically 5, 7 or 10 years. If you sign on for a 5/1 ARM loan, for example, you’ll have a fixed interest rate for the first 5 years. During this introductory period, you pay a fixed interest rate that’s usually lower than 30-year fixed rates.
After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to calculate how rates are changing. Your rate will go up if the index's market rates go up. If they go down, your rate goes down.
ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For instance, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.
Adjustable-rate loans can be a good choice if you plan to buy a starter home before moving to your forever home. You can easily take advantage and save money if you don't plan to live in your home throughout the loan’s full term.
These can also be especially beneficial if you plan on paying extra toward your loan early on. ARMs can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.
Pros Of Adjustable-Rate Mortgages:
- Gives lower interest rates for the initial introductory period.
Cons Of Adjustable-Rate Mortgages:
- If the rate increases, it can dramatically increase your monthly payments.
Home Buyers Who Might Benefit:
- Those who are purchasing a starter home and don’t expect to live there for the loan’s full term.
Government-backed loans are insured by government agencies. When lenders talk about government-backed loans, they’re referring to three types of loans: FHA, VA and USDA loans. These loans are less risky for lenders because the insuring body foots the bill if you default on your mortgage. You may qualify for a government-backed loan if you can’t get a conventional loan.
Each government-backed loan has specific criteria you need to meet in order to qualify along with unique benefits, but you may be able to save on interest or down payment requirements, depending on your eligibility.
FHA loans are insured by the Federal Housing Administration. An FHA loan can allow you to buy a home with a credit score as low as 580 and a down payment of 3.5%. With an FHA loan, you may be able to buy a home with a credit score as low as 500, if you pay at least 10% down. Rocket Mortgage® requires a minimum credit score of 580.
USDA loans are insured by the United States Department of Agriculture. USDA loans have lower mortgage insurance requirements than FHA loans and can allow you to buy a home with no money down. You must meet income requirements and buy a home in a suburban or rural area in order to qualify for a USDA loan. Rocket Mortgage does not currently offer USDA loans.
VA loans are insured by the Department of Veterans Affairs. A VA loan can allow you to buy a home with $0 down and lower interest rates than most other types of loans. You must meet service requirements in the Armed Forces or National Guard to qualify for a VA loan.
Pros Of Government-Backed Loans:
- It is possible to save on interest and down payments, which could mean reduced closing costs.
- There are less strict qualification requirements than conventional loans.
Cons Of Government-Backed Loans:
- You must meet specific criteria to qualify.
- Many types of government-backed loans have insurance premiums (also called funding fees) that are required upfront, which can result in higher borrowing costs.
Home Buyers Who Might Benefit:
- Those who don’t qualify for conventional loans or have low cash savings.
A jumbo loan is one that’s worth more than conforming loan standards in your area. You usually need a jumbo loan if you want to buy a high-value property. For example, you can get up to $2 million in a jumbo loan if you choose Rocket Mortgage. The conforming loan limit in most parts of the country is $726,200.
Jumbo loan interest rates are usually similar to conforming interest rates, but they’re more difficult to qualify for than other types of loans. You’ll need to have a higher credit score and a lower DTI to qualify for a jumbo loan.
Pros Of Jumbo Loans:
- Their interest rates are similar to conforming loan interest rates.
- You can borrow more for a more expensive home.
Cons Of Jumbo Loans:
- It’s difficult to qualify for, typically requiring a credit score of 700 or higher, significant assets and a low DTI ratio.
- You’ll need a large down payment, typically between 10 – 20%.
Home Buyers Who Might Benefit:
- Those who need a loan larger than $726,200 for a high-end home, have a good credit score and low DTI.
The Bottom Line: Find The Best Mortgage For You
The best type of mortgage loan depends on your individual preferences and situation. Prior to choosing your home loan, calculate your estimated purchase and refinancing costs to figure out how much you’ll need to borrow from your mortgage lender.
Prospective home buyers have a lot to consider when choosing from the different types of mortgage loans available. Your credit score, income, debt and property location all influence the home buying process and type of mortgages you can get. Start the mortgage application process to find a personalized solution that best fits your situation.
Want to change your mortgage, consolidate debt or just need cash?
Apply for a refinance with Rocket Mortgage® today.
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