Types of home loans and how they work

Just as there are many types of homes, there are many types of home loans. A home loan, also called a mortgage, lends you money to buy a property. The property itself secures the loan. Most differences between home loans come down to three choices: the loan program, the loan term, and the interest rate type. Once you see how those pieces fit together, comparing offers gets a lot simpler.

Key takeaways:

• Home loans differ in three ways: the loan program you use, the length of your loan term, and whether your interest rate is fixed or adjustable.
• Conventional loans are the most widely available option, while FHA, VA, and USDA programs exist to lower the credit and down payment barriers for buyers who qualify.^1,2
• The best loan for you depends on your down payment, credit score, debt-to-income ratio, eligibility for government programs, and what you plan to do with the property.

Types of home loans at a glance

The table below compares the major home loan programs. You can see the full lineup of home loan options available through Rocket Mortgage.

Standard home loans options

The length of your repayment term and how interest is charged are options common to most home loans.

Loan term

Your loan term is how long you have to repay your loan. It’s usually 30 years or 15 years, but some lenders allow custom terms.

A shorter term means higher monthly payments but a lower rate and lower overall interest costs.

A longer term will have a lower monthly payment, but you’ll pay more in overall interest.

Fixed-rate mortgage

With a fixed-rate mortgage, your interest rate is set at closing and never changes, so your principal and interest payment stay the same.

The monthly total still can change if you’re paying into an escrow account to cover your property tax and homeowners insurance bills.

The Consumer Financial Protection Bureau reports that 85% to 95% of buyers chose a fixed-rate mortgage between 2008 and 2022.

Adjustable-rate mortgage

An adjustable-rate mortgage (ARM) has an introductory interest rate that doesn’t change for a fixed period, usually 5, 7, or 10 years.

This rate is often lower than the rate for fixed-rate mortgages.

After the introductory rate expires, your mortgage rate will adjust to match market rates at specific intervals, usually every 6 or 12 months. Your monthly payment will change depending on whether interest rates increase or decrease.

Most ARMs have rate caps that limit how much the rate can adjust at any specific adjustment and overall from the initial rate.

Conventional home loans

A conventional mortgage is any loan that’s issued by a private lender and isn’t insured by the government.

Conventional loans are the most common mortgage type and tend to cost less than FHA loans, though they can be more difficult to qualify for.

They’re also the most flexible on property type, since they can be used for vacation homes and investment properties, which government loans generally don’t allow.

There are two types: conforming and nonconforming.

Conforming loans

A conforming conventional loan meets specific requirements, including a maximum loan limit, that allow lenders to sell the loans to Fannie Mae or Freddie Mac.

The loan limit is determined each year by the Federal Housing Finance Agency and varies by location and the number of units in the property.

Conforming loan limits vary by county. A baseline loan limit applies in most counties, while a high-cost limit applies in counties where homes are more expensive.

Conforming loans also require borrowers to make a down payment of 3% for a fixed-rate loan on a one-unit property, and 5% for an ARM on one unit or loans with two to four units.⁴

A down payment of less than 20% requires paying for private mortgage insurance (PMI) until you’ve paid down your loan balance enough to have 20% equity in your home.

Borrowers usually must have a debt-to-income ratio (DTI) of no more than 36%, though lenders may accept a DTI as high as 50% with qualifying conditions.

Nonconforming loans

A nonconforming loan is a conventional loan that fails to meet the requirements for a conforming loan. Nonconforming loans cannot be sold to Fannie Mae or Freddie Mac.

The most common nonconforming mortgage is the jumbo loan, which exceeds the conforming loan limit.

The CFPB notes that nonconforming loans are less standardized, so eligibility, pricing, and features will vary by lender.

Jumbo loans

A jumbo loan is a nonconforming mortgage above the conforming limit in your county, which means more than $832,750 in most of the country for 2026.

Because lenders can’t sell these loans to Fannie Mae or Freddie Mac, requirements are stricter. It’s typical for jumbo loans to require a credit score of 680 or higher and a down payment of 10% or more.

Rocket Mortgage offers Jumbo Smart loans with a 10% down payment on fixed-rate loans of up to $2 million.⁵

Government-backed home loans

With a government-backed loan, a federal agency insures or guarantees part of the loan if the lender defaults. That reduces the lender’s risk, which is why these programs allow lower credit scores and small down payments.

FHA loans

An FHA loan is for buyers who have a lower credit score and need a low down payment.

Borrowers with a credit score of 580 need a minimum down payment of 3.5% down. Buyers with a credit score of 500 – 579 need a down payment of at least 10%.

FHA loans require you to buy a primary residence, and you must meet county loan limits. For 2026, the one-unit floor is $541,287, and the high-cost ceiling is $1,249,125.

Mortgage insurance premiums (MIP) are required on every FHA loan.

VA loans

A VA loan is available to qualifying military personnel, veterans, and their surviving spouses.

VA loans require no down payment for most borrowers, but lenders may have their own requirements.

There is no mortgage insurance, but most borrowers pay a one-time VA funding fee. On a purchase loan, that’s 2.15% of the loan amount for first-time use with less than 5% down, dropping to 1.5% at 5% down and 1.25% at 10% down. Borrowers receiving VA compensation for a service-connected disability are exempt.

USDA loans

USDA loans help low- and moderate-income households buy a home in an eligible rural area with no down payment. Rocket Mortgage currently doesn’t offer USDA loans.

Borrowers need to occupy the home as their primary residence.

Household income generally can’t exceed 115% of the area median income.

Other types of home loans to know

These products solve narrower problems. Some finance a home under unusual circumstances, and others let you borrow against a home you already own.

Construction loans

A construction loan is short-term financing used to build a home.

Some loans offer construction-to-permanent financing, which means you close once, and the construction loan converts to a permanent mortgage when construction is completed. Fannie Mae caps any single-construction period at 12 months and the total at 18 months.

You also can do two transactions, getting a construction loan to build and then refinancing it into a mortgage when complete. This requires two closings.

Renovation loans

A renovation loan combines the purchase price with repair costs, which makes it the natural fit for a fixer-upper.

The FHA’s Section 203(k) program insures a single mortgage covering the purchase or refinance plus the rehabilitation of a home at least a year old. Part of the loan pays the seller, and the rest goes into escrow and is released as work is completed.

A Standard 203(k) requires at least $5,000 in repairs and a HUD-approved consultant. A Limited 203(k) covers smaller, nonstructural projects.

Home equity loans and HELOCs

These are second mortgages that allow you to borrow the equity in your home.

A home equity loan lets you borrow a lump sum, usually with a fixed interest rate.⁶

A home equity line of credit (HELOC) works more like a credit card. Your equity establishes a borrowing limit, and you can borrow money as needed during the draw period. Once the draw period ends, you make payments on the amount you borrowed until it’s paid. Rocket Mortgage currently doesn’t offer HELOCs.

Bridge loans

A bridge loan, sometimes called a swing loan, is a temporary loan often used when you need to close on a new home before your current one has sold.

Fannie Mae allows it as a source of funds for the down payment as long as it isn’t cross-collateralized against the new property. The lender also must document that you can afford to carry the new home, the current home, the bridge loan, and your other obligations at once.

Bridge loans enable clients to leverage their current home's equity to purchase a new home before selling their existing property. This is short-term financing, usually 6 months or less, designed for clients who intend to sell their home within 12 months.

Interest-only mortgages

With an interest-only mortgage, your payments cover only the mortgage interest for a set period. Your principal is not affected. When that period ends, your payment increases to cover both principal and interest on a shorter remaining term.

The CFPB groups interest-only structures with other risky features worth questioning, alongside prepayment penalties, balloon payments, and negative amortization. These loans often fall into the broader nontraditional mortgage category.

Reverse mortgages

A reverse mortgage allows older homeowners to borrow their equity without making payments. Instead of making payments that reduce the amount you owe, you receive payments, and the amount you owe increases.

The only federally insured version is the home equity conversion mortgage (HECM), available through FHA-approved lenders to homeowners at least 62 years old who occupy the home as their principal residence. Borrowers must complete HECM counseling and can stay in the home as long as property taxes and homeowners insurance remain current.

How to choose the right type of home loan

Comparing the best loan for buying a house means weighing your cash, your monthly budget, your qualifications, and the fine print. It also helps to know the types of mortgage lenders you can work with, since not every lender offers every program.

Compare your down payment options

Your down payment often decides which programs are realistic.

VA and USDA loans can be financed with nothing down, FHA starts at 3.5% with a 580 score, conventional loans start at 3%, and jumbo loans generally require 10% or more. Less than 20% down on a conventional loan usually means mortgage insurance, and on a VA loan, 5% or 10% down reduces your funding fee.

Compare your monthly payment and loan term

Affordability is about the whole payment, not just principal and interest. Factor in property taxes, homeowners insurance, mortgage insurance, utilities, HOA fees, and closing costs, then consider the term. A 15-year loan increases the monthly payment while lowering total interest, while a 30-year term has a more affordable payment but costs more overall.

The mortgage calculator from Rocket Mortgage can help you estimate your costs before you talk to a lender.

Compare your credit score and eligibility

Your credit score and DTI shape both the programs you qualify for and the rate you’re offered. From there, a few yes-or-no questions narrow the list fast: Do you have qualifying military service? Is the property in a USDA-eligible rural area, and is your income under the cap? Will this be your primary residence? Does your loan amount fit under the county conforming limit? Buyers receiving disability income may also want to review the mortgage options available to people with disabilities. Once you’ve shortlisted programs, shopping several lenders and comparing official Loan Estimates allows you to compare costs side by side.

Check for risky features

Before you commit, look for features that could surprise you later. The CFPB advises asking about prepayment penalties, balloon payments, negative amortization, and interest-only structures, then requesting a second Loan Estimate for a comparable loan without them so you can compare costs. With an ARM, confirm when the first adjustment hits, how often it repeats, and what the caps are.

FAQ

Here are answers to common questions about types of home loans.

What are the three main types of mortgages?

The three main categories are conventional loans, government-backed loans, and special programs such as state and local housing agency loans. Mortgages are also grouped by term, most commonly 15-year and 30-year, and by rate type, either fixed or adjustable.

What are the 7 types of loans?

The seven categories covered here are conventional, FHA, VA, USDA, jumbo, construction, and renovation loans. Home equity loans, HELOCs, bridge loans, interest-only mortgages, and reverse mortgages round out the specialty options.

What types of home loans have no down payment?

VA and USDA loans can be financed with no money down for borrowers who qualify. VA loans require eligible military service, and USDA loans require an eligible rural property plus household income within the program limits.

What type of home loan is best for a fixer-upper?

A renovation loan is usually the best fit, since it finances the purchase price and the repairs in one mortgage instead of requiring separate financing. The FHA 203(k) program is the best-known option, and conventional renovation programs work similarly.

The bottom line: Compare home loan types before you choose

There’s no single best mortgage, only the one that fits your situation. Make sure you understand which loans you may qualify for, what you need to qualify, and which interest rate type and term best fit your budget and your financial goals.

If you’re ready to start shopping for a home, explore your borrowing options today with Rocket Mortgage.

¹ Rocket Mortgage is not acting on behalf of FHA or HUD.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

³ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

⁴ The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

⁵ Rate pricing and closing costs dependent on loan qualification requirements and factors including but not limited to credit, income, assets, down payment, product selection and loan amount. This is not a commitment to lend.

⁶ Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, investment or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

Rocket Mortgage is a trademark or service mark of Rocket Mortgage LLC or its affiliates.