7 Types Of Home Loans: Which One Is Right For You?

You can choose from different types of home loans when you’re about to purchase a home. Getting the right kind of mortgage loan when buying a home can help make payments more affordable. Learn about the 7 most common types of home loans to see which is the best fit for your specific situation.

Types Of Mortgage Loans

Although the following types of home loans can fall into multiple categories, there are seven basic types: 

1. Conventional Loan
2. Fixed-Rate Mortgage
3. Adjustable-Rate Mortgage
4. VA Loan
5. FHA Loan
6. USDA Loan
7. Jumbo Loan

For example, a conventional loan can also be either a fixed-rate or an adjustable-rate mortgage.

7 Different Types Of Home Loans, Explained

Understanding the main features of different home loan types will help you to decide what is the best type you should pick.

1. Conventional Loan

A conventional loan is a loan offered by private lenders and isn’t directly backed by the government. Lenders who originate conventional loans need to follow down payment and income requirements set by Freddie Mac and Fannie Mae. The most popular terms for conventional loans are 15-year or 30-year terms, though some lenders offer loans from 8 – 30 years. Most borrowers — as long as they meet the requirements like credit score and income minimums— choose conventional loans.

2. Fixed-Rate Mortgage

A fixed-rate mortgage is a home loan that has the same mortgage rate throughout the loan term. Your monthly interest and principal payments remain the same until the loan is paid off. This type of loan is best for those who want predictable payments, though rates may be initially higher than adjustable rates.

3. Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) is one where your interest rate can fluctuate throughout your loan term. In most cases, borrowers will be offered a fixed (and often lower) introductory interest rate for a period of time. When that's over, your mortgage rate could fluctuate based on factors like economic conditions. Your lender will stipulate terms like the rate not going higher or lower than a certain amount.

When looking at ARM loans, you'll see two numbers, like 5/6, 7/6 or 10/6. The first or top number is the number of years in your introductory period and the other one tells you the number of months before the rate can fluctuate. For example, a 7/6 ARM means that you’ll receive an introductory rate for 7 years, then the rate can adjust down or up every 6 months afterward.

4. VA Loan

A VA loan is backed by the VA, or Department of Veterans Affairs. Borrowers who are qualified veterans, active duty members, and surviving spouses can benefit from a VA loan. There is typically a lower credit score and no down payment requirement. Lenders may have their own requirements, so check to see what you may need to qualify.

5. FHA Loan

An FHA loan is backed by the Federal Housing Administration (FHA) and is designed to make housing more accessible for first-time homebuyers and low-income aspiring homeowners. FHA loans have lower credit score requirements than conventional loans. Home buyers with a minimum 580 credit score can make a down payment as low as 3.5%. Your debt-to-income ratio can be as high as 43%.

FHA loans have maximum loan limits depending on the location, so speak with a lender about your options.

6. USDA Loan

Backed by the U.S. Department of Agriculture, USDA loans are for borrowers who want to purchase a primary residence in qualifying rural or suburban areas. There are also income limits you need to meet. Those who qualify need to have at least a 640 credit score and a DTI no higher than 50%.

7. Jumbo Loan

A jumbo loan exceeds FHFA conforming loan limits, so you may have to meet stricter requirements and pay more in interest and fees.

Considerations Before Choosing A Mortgage

When looking for a mortgage, get to know the common terms you may come across. That way, you can understand exactly what your rights and obligations are as a borrower.

Terms include:

• Down payment: The amount you need to pay out of pocket to buy a home.
• Monthly payment: The amount you pay each month to your mortgage lender.
• Debt-to-income ratio (DTI): The percentage of your income that goes towards debts.
• Credit score: A three-digit number calculated by the credit reporting bureaus that gives lenders insights into your borrowing behavior.
• Interest rate: The cost to take out a loan, which is typically a percentage of your loan amount.
• Loan term: The amount of time you have to pay back your entire loan.

Mortgage Loan Categories

Mortgages fall into several categories: conventional, non-conventional, and government-backed loans.

Conventional Conforming Loans

Conventional conforming loans have a maximum loan amount and meet Freddie Mac and Fannie Mae requirements and guidelines. Loans can either be fixed or have adjustable rates.

Government-Backed Nonconforming Loans

Government-backed nonconforming loans and include:

• FHA loans
• USDA loans
• VA loans

The government works with partnering lenders to issue loans and will pay them if you end up defaulting on the loan.

Conventional Nonconforming Loans

Nonconforming loans are mortgages that exceed conforming loan amounts or don't meet ones set by the Federal Housing Finance Agency (FHFA). Jumbo loans are a type of nonconforming loan. You may have to pay higher rates and meet more strict lender requirements.

Other Types Of Mortgages

Some of the following types of mortgages are more specialized and meet particular needs.

Construction Loan

This type of short-term loan helps homeowners to pay for the cost of a custom home construction. You can use it to purchase land, material, permits and labor costs. Once you get the go ahead (or an occupancy certificate) from a home inspector or appraiser, the loan will turn into a traditional mortgage.

Land Loan

A land loan is for borrowers to purchase undeveloped land, land that’s slightly developed, or an area that has access to amenities like roads and water. You may need a higher credit score to qualify.

Balloon Mortgage

With a balloon mortgage, you’ll pay a large final mortgage payment at the end of your loan term. You may not make any monthly payments, or you might make a much lower one for a certain period of time. If you go this route, you need to budget carefully to ensure you have enough money to pay off the balloon payment.

Reverse Mortgage

A reverse mortgage is for homeowners at least 62 years old who want to tap into their home equity. Instead of paying the loan, you will receive monthly payments based on what the lender offers. Borrowers are still responsible for maintenance, insurance and property taxes. The loan is due when you move out of the home, you pass away or fail to meet the property standards set by the lender.

The Bottom Line: Choosing The Right Type Of Home Loan Is Key

Choosing the appropriate type of home loan for your situation can help you pay the lowest amount of interest possible and be able to manage your monthly payments. Work with a reputable lender to see what your options could be. You can also kick off the preapproval process today to see how much home you can afford — your credit score generally won’t be affected.