Top 16 Types of Mortgage Loans You Should Know

By Amanda Bailey
11 min read

Top 16 Types of Mortgage Loans You Should Know

Navigating home loan options can be confusing. This article explains the different types of mortgage loans to help you find the best one for your needs.

Key Takeaways

  • Conventional loans are versatile and widely favored, requiring a minimum credit score of 620 and offering competitive interest rates.
  • FHA loans assist first-time buyers with lower credit scores and a low down payment, but involve mortgage insurance costs.
  • VA loans provide significant benefits for veterans, including no down payment and no PMI, making homeownership more accessible.

Understanding Mortgage Basics

What is a Mortgage Loan?

A mortgage loan is a financial agreement where a lender provides funds to a borrower to purchase a home or other real estate property. In return, the borrower commits to repaying the loan through regular monthly mortgage payments, which typically include principal, interest, taxes, and insurance (PITI). These loans can be sourced from various institutions, such as banks, credit unions, and government agencies.

Mortgage loans come in several varieties, each with unique features, benefits, and potential drawbacks. The main types include fixed-rate mortgages, adjustable-rate mortgages, government-backed loans, and jumbo loans. Understanding these different types of mortgage loans is crucial for borrowers to make informed decisions that align with their financial goals and circumstances.

Conventional Loans

Conventional loans are the bread and butter of the mortgage world, widely recognized and highly favored for their versatility. They come in two flavors: conforming loans, which meet the standards set by the Federal Housing Finance Agency (FHFA), and non-conforming loans, which do not. This distinction makes conventional loans appealing to a broad spectrum of homebuyers, offering competitive interest rates and flexible terms that can suit various financial situations.

Qualifying for a conventional loan typically requires a credit score of at least 620. Though this can be a challenge, it becomes advantageous for those with strong credit and the capacity for a substantial down payment. With down payments starting as low as 3% to 5% of the purchase price, these loans are more accessible than often perceived.

A key advantage of conventional loans is their higher loan limits, enabling the purchase of more expensive properties. However, putting down less than 20% necessitates paying for private mortgage insurance (PMI) until reaching 20% equity. While this insurance safeguards the lender, it does increase the monthly payment, so it should be factored into your overall costs.

FHA Loans

FHA loans are a beacon of hope for first-time homebuyers and those with lower credit scores. Backed by the Federal Housing Administration, these home loans are designed to help borrowers who might not qualify for conventional loans. One of the most appealing aspects of FHA loans is their low down payment requirement, which can be as little as 3.5% of the purchase price.

A credit score of 580 or above is generally needed to qualify for an FHA loan and benefit from the low down payment option. Furthermore, FHA loans are more lenient with debt-to-income ratios, making them accessible to borrowers with higher debt levels relative to their income.

However, borrowers are required to pay both upfront and annual mortgage insurance premiums on their mortgage loan, which can add up over the life of the loan.

VA Loans

VA loans are a fantastic option for veterans, service members, and their spouses. These loans, backed by the Department of Veterans Affairs, offer significant benefits, including the possibility of purchasing a home with no down payment. This feature alone can make homeownership more accessible for those who have served our country.

Another significant benefit is that VA loans do not require private mortgage insurance (PMI), leading to substantial savings over time. VA loans also often come with fewer closing costs and competitive interest rates, potentially reducing monthly payments. Borrowers must provide a Certificate of Eligibility to qualify for these benefits.

Jumbo Loans

Jumbo loans step in where conventional loans leave off, perfect for financing high-value properties that exceed the limits set by conventional mortgage loans. As of 2025, the conforming loan limit is typically around $806,500, but jumbo loans can go much higher, sometimes up to $4 million.

Qualifying for a jumbo loan involves more stringent standards, including a higher credit score and strong credit history. Borrowers typically need a down payment of at least 10%, and some lenders may also require cash reserves covering 6-12 months of mortgage payments.

While these loans help you purchase luxury properties, they also come with higher monthly payments and interest rates reflecting the increased risk to lenders.

USDA Loans

USDA loans are a hidden gem for those looking to purchase a home in rural areas. These loans, backed by the U.S. Department of Agriculture, are designed to assist low to moderate-income buyers in rural regions. One of the most attractive features of USDA loans is that no down payment is required, making them an excellent option for buyers with limited funds.

The property must be in a designated rural area, and the applicant’s household income should fall below specific regional limits to qualify. A minimum credit score of 620 is generally required. USDA loans offer 100% financing of the home’s appraised value, covering the purchase price and any upfront fees.

Fixed-Rate Mortgages

Fixed-rate mortgages are the stalwarts of the mortgage world, offering stability and predictability in your monthly payment. With a fixed-rate mortgage, your interest rate remains constant for the entire life of the loan, which is typically either 15 or 30 years. This consistency means your monthly mortgage payment will stay the same, making it easier to budget and plan for the future. Additionally, a fixed rate loan provides similar benefits, ensuring that your financial commitments remain stable. Fixed rate loans also contribute to this sense of security.

One of the main advantages of fixed-rate mortgages is that they protect borrowers from future increases in interest rates. However, if interest rates are high when you lock in your loan adjustable rate mortgage, you might face higher monthly payments compared to adjustable rate mortgages initially.

Fixed-rate mortgages are ideal for those who plan to stay in their homes long-term and prefer the predictability of stable payments.

Adjustable Rate Mortgages

An adjustable-rate mortgage (ARM) is a type of mortgage loan where the interest rate can fluctuate over time. The rate is usually tied to a specific financial index, such as the prime rate or the London Interbank Offered Rate (LIBOR). As the index rate changes, so does the interest rate on the ARM, which can lead to variations in the monthly mortgage payment.

ARMs often start with a lower introductory interest rate compared to fixed-rate mortgages, making them appealing to borrowers looking to qualify for a larger loan amount or lower initial monthly payments. However, the trade-off is the risk of rising interest rates, which can increase the monthly mortgage payment over time. This makes ARMs a suitable option for those who plan to sell or refinance before the adjustable period begins.

Bank Statement Only Loans

Bank statement only loans are a lifeline for self-employed individuals who often struggle to meet traditional income verification requirements. Instead of relying on tax returns, these loans use personal or business bank statements from the past 12 or 24 months to determine income. This makes it easier for self-employed borrowers to qualify for a mortgage without the need to demonstrate their income through traditional means.

A minimum credit score of 640 is generally required for loans with up to 75% loan-to-value (LTV), while a score of 720 is necessary for a maximum LTV of 90%. These loans can be issued for amounts up to $2 million and cover purchase, cash-out, or rate-term refinancing.

Cash-Out Refinance

A cash-out refinance allows homeowners to tap into their home equity by taking out a new mortgage for more than they owe on their existing loan and receiving the difference in cash. This can be a cost-effective way to finance home improvements, consolidate high-interest debts, or cover other financial needs.

A major advantage of a cash-out refinance is the potential for a lower interest rate compared to other borrowing forms. However, the increased loan amount raises your overall debt burden, potentially leading to higher monthly payments. Homeowners generally need at least 20% equity in their property to qualify.

HELOC (Home Equity Line of Credit)

A Home Equity Line of Credit (HELOC) provides homeowners with a revolving credit line based on their home’s equity, offering flexible access to funds as needed. Typically, borrowers can access up to 80% of their home’s value minus the outstanding mortgage balance.

HELOCs typically come with variable interest rates that fluctuate based on financial indexes like the U.S. Prime Rate. The draw period, when you can borrow funds, usually lasts around 10 years, followed by a repayment period that can extend up to 20 years. Some lenders provide the option to convert part of the HELOC balance to a fixed rate for more predictable monthly payments.

FHA 203k Loans

FHA 203k loans are a unique option that allows homebuyers to finance both the purchase and renovation of a property through a single mortgage. Ideal for those looking to buy a fixer-upper, there are two types of FHA 203k loans: Standard 203k for major repairs and Limited 203k for smaller improvements.

Borrowers generally need a credit score of around 640, and the property must be their primary residence to qualify. The loan proceeds can cover the purchase price and renovation costs, with a down payment of approximately 3.5% of the total costs. This loan is especially useful for buyers looking to personalize their new home through specific renovations.

Reverse Mortgages

Reverse mortgages are designed for homeowners aged 62 or older, allowing them to leverage their home equity without the obligation of monthly payments. The most common type is the Home Equity Conversion Mortgage (HECM), which is federally insured and available through FHA-approved lenders.

Borrowers can use funds from a reverse mortgage for various expenses, such as home maintenance or living costs, without needing to sell their homes. Repayment is due when the home is sold, the homeowner moves, or upon their death. A mandatory counseling session with a HUD-approved counselor is required before applying to ensure borrowers understand the process and implications.

Non-Warrantable Condo Loans

Non-warrantable condo loans apply to condominiums that do not meet the criteria set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These properties might have over 50% of units owned by investors or face pending legal issues, making traditional financing challenging.

Non-warrantable condo loans often come with higher interest rates and require larger down payments due to the increased risk. Buyers must provide proof of stable income and meet stringent credit score requirements to qualify.

Multifamily DSCR Loans

Multifamily DSCR loans are tailored for properties with multiple units, repaid using the cash flow generated by tenants. The debt service coverage ratio (DSCR) is a critical factor, calculated by dividing the property’s net operating income by its debt obligations.

Lenders generally seek a DSCR of at least 1.20 to ensure the property’s income covers its debt. Some property types, like hotels, may require a higher DSCR to secure financing.

Construction Loans

A construction loan is a specialized type of mortgage loan used to finance the building of a new home or other real estate projects. These loans are typically short-term and cover the costs associated with construction, including labor, materials, and land acquisition.

Construction loans usually have variable interest rates and often require a balloon payment at the end of the loan term. During the construction phase, borrowers typically make interest-only payments. Once the construction is complete, the loan can be converted into a permanent mortgage. This type of loan is ideal for those looking to build their dream home from the ground up, offering flexibility and tailored financing options.

Interest-Only Mortgages

An interest-only mortgage is a type of mortgage loan that allows borrowers to pay only the interest on the loan for a set period, usually between 5 to 10 years. During this period, the borrower does not make any payments towards the principal balance, resulting in lower monthly mortgage payments.

Interest-only mortgages can be advantageous for borrowers who want to minimize their monthly payments or qualify for a larger loan amount. However, they come with the risk of a significant balloon payment at the end of the interest-only period, which can be challenging to manage. This type of loan is best suited for borrowers who expect their income to increase in the future or plan to sell or refinance before the interest-only period ends.

Summary

Throughout this exploration of mortgage loans, we’ve uncovered a variety of options tailored to different needs and situations. From the versatility of conventional loans to the specialized benefits of VA, FHA, and USDA loans, there’s a mortgage solution for everyone. Each type of loan has its unique advantages and requirements, making it crucial to assess your financial situation and homeownership goals carefully.

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Choosing the right mortgage can open the door to your dream home. So, whether you’re a first-time homebuyer, a veteran, or looking to invest in a property, understanding these mortgage options is the first step to making an informed decision. Here’s to finding the perfect key to unlock your future home!

Frequently Asked Questions

What is a conventional mortgage best suited for?

A conventional mortgage is best suited for buyers with strong credit and a substantial down payment, making it a great option if you fit that bill.

What is a Bank Statement Only Loan designed for?

A Bank Statement Only Loan is perfect for self-employed folks who want to buy a home without the usual income documentation hassles. It makes homeownership more accessible for those with variable income.

What does a cash-out refinance allow homeowners to do?

A cash-out refinance lets homeowners tap into their home equity and get cash for things like home improvements, debt consolidation, or other expenses. It’s a smart way to put your home’s value to work for you!

What is the primary benefit of a USDA loan?

The primary benefit of a USDA loan is that it allows you to buy a rural property with little or no money down, making homeownership super accessible.

Who can benefit from a VA loan?

If you’re a veteran, service member, or their spouse, a VA loan can be a great option since it doesn’t require any down payment. It’s a fantastic way to help you secure a home without the usual financial hurdles.