What Type of Mortgage Should I Get?

Learn the best type of mortgage for you

People seated at a table, looking at paperwork
•••

FG Trade / Getty Images

Imagine that you’ve decided to buy a home and are ready to get preapproved for a mortgage. But once you start researching, you find there are many different types of home loans to choose from, each with its own requirements, benefits, and downsides. How can you decide which type of loan is best for you?

Before you take out a mortgage, it’s important to understand the different options available and how they may work with your situation. We’ll explain the different types of mortgages and what factors to consider when choosing your best option.

Key Takeaways

  • There are many different types of mortgages available, each of which is best suited to a particular situation and type of borrower.
  • Conventional loans include fixed-rate loans, adjustable-rate mortgages (ARMs), and non-conforming (also known as “jumbo”) loans.
  • The government-backed loans available include Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans.
  • The best type of mortgage for you depends on your financial situation, the home you want to buy, your preferred interest-rate type and loan term, and more.

What To Consider While Shopping for a Mortgage

When you start shopping for a mortgage, you might be surprised by how many options you have. In addition to the standard 30-year fixed-rate loan that most borrowers know about, you’ll also have several other types of mortgages to choose from.

With so many options, it’s easy to get mired in confusion about the right type of loan for you. Here are a few things to consider while shopping for a mortgage and working to choose the right one for you.

1. Your Financial Situation

Your personal financial situation will be one of the most important factors in deciding which type of mortgage is right for you. Here are a few aspects of your personal finances that will play a role in what mortgages you should consider:

  • Credit score: A conventional loan generally requires a credit score of at least 620, but certain government-backed loans are available to borrowers with lower credit.
  • Down-payment size: Each type of loan has its own down-payment requirements. Certain types of mortgages, including both conventional and FHA loans, require a down payment, while VA and USDA loans don’t.
  • Income: Most mortgages don’t have a minimum or maximum income requirement. Instead, your eligibility depends on your income in relation to the monthly payment of the mortgage. However, certain government-backed loans do require that borrowers fall under a certain income limit.

2. The Home You Want To Buy

The location and price of the home you want to buy may dictate what type of mortgage you can choose. For example, if you’re looking at a home that’s very expensive for your area, you may be limited to a jumbo loan, which exceeds the baseline conforming loan limit set by the federal government. If you’re considering a U.S. Department of Agriculture (USDA) loan, you’ll only qualify if the home you purchase is in an eligible rural area.

3. The Type of Interest Rate You Want

Depending on the types of mortgages you’re eligible for, you may be able to opt between a fixed-rate or adjustable-rate mortgage. We’ll explain these in greater detail below, but know that each option has its pros and cons. Fixed-rate loans are more popular and generally lower risk. However, ARMs may be preferable for certain borrowers who can accept a bit more risk, especially if they plan to be in the home for a shorter period.

4. Your Preferred Loan Term

A 30-year loan may be the most popular option for a mortgage, but it’s not the only choice. Many borrowers choose mortgage terms as low as 15 years. Those loans often come with lower interest rates and the ability to pay off your mortgage more quickly, but you’re also stuck with higher monthly payments during the life of the loan.

5. Your Extenuating Circumstances

Depending on your personal situation, you may have more options when choosing a home loan. For example, homebuyers who have served in the military or those living in rural areas have access to certain government-backed loans.

6. Loan Costs and Fees

Depending on your situation, you may qualify for several different types of loans. If that’s the case, it’s important to consider the costs and fees associated with each type. Even a small difference in the interest rate of a loan can equate to tens of thousands of dollars over the entire loan term. And while some loans may offer upfront benefits, they may be more costly in the long run. If you’re weighing your options between a couple of different loans, run the numbers.

Conventional Fixed-Rate Mortgage

A conventional fixed-rate mortgage is the most common type of home loan. A conventional loan is one that isn’t backed by a government entity. The fixed-rate means you qualify for a certain interest rate when you take out the mortgage, then keep that fixed rate and make fixed payments throughout the entire life of the loan.

Conventional mortgages can be either 15- or 30-year loans, with 30-year fixed-rate loans being the most common type. While 15-year fixed-rate mortgages require higher monthly payments, they also tend to have lower interest rates and allow you to pay off your loan more quickly.

While the terms “conventional” and “conforming” are often used interchangeably when describing mortgages, they aren’t the same thing. A conventional mortgage is one that isn’t backed by a government agency, while a conforming loan is one that meets the loan limits set by the Federal Housing Finance Agency (FHFA).

Key Features

  • Minimum down payment: 3%
  • Minimum credit score: 620
  • Debt-to-income (DTI) ratio: 36% to 50%, depending on the underwriting and credit score
  • Mortgage insurance: Private mortgage insurance (PMI) with less than 20% equity
  • Loan limits: $647,200 to $970,800, depending on location
  • Other requirements: None

Pros and Cons

Pros
  • Predictable interest rate and payment

  • Low down-payment requirement

  • Lower costs than FHA loans

Cons
  • More difficult to qualify

  • Higher interest rate than an ARM

  • PMI required for less than 20% down

Pros Explained

  • Predictable interest rate and payment: Due to the fixed interest rate, a conventional fixed-rate mortgage has the same payment for the entire loan term.
  • Low down-payment requirement: This type of loan only requires 3% down, while certain other loans may require more for the down payment.
  • Lower costs than FHA loans: When you account for the interest rate, mortgage insurance, and other costs, conventional loans are often cheaper than some government-backed loans.

Cons Explained

  • More difficult to qualify: Due to the higher credit-score requirement and other factors, a conventional loan may be more difficult to qualify for than a government-backed loan.
  • Higher interest rate than an ARM: While they may offer more predictability, fixed-rate loans often have higher starting rates than adjustable-rate loans.
  • PMI required for less than 20% down: While you can put down as little as 3% on a conventional fixed-rate loan, you’ll pay PMI as long as you have less than 20% equity.

When a Conventional Fixed-Rate Mortgage Works Best

A conventional fixed-rate mortgage is best for borrowers who can qualify for the stricter loan requirements, such as the higher credit score and the down-payment requirement. It’s also best for those who want the predictability of the same monthly payment for the entire loan term.

Conventional Adjustable-Rate Mortgage

A conventional ARM shares many of the same characteristics as a conventional fixed-rate mortgage. This type of loan isn't backed by a government agency and can come in either 15- or 30-year loan terms.

The key difference between the two loans is that with an ARM, you don't have a fixed interest rate for the life of the loan. Instead, your loan rate can change throughout the loan term based on the index it's tied to. An ARM has a few important components:

  • Initial rate: When you borrow your ARM, you'll have a starting interest rate, which is often lower than the rate you could get on a conventional fixed-rate loan.
  • Initial rate period: An ARM allows you to lock in your initial rate for a set period, often up to ten years. During this time, your interest rate won't change.
  • Adjustment period: Once you're past the initial rate period, the adjustment period is how often your interest rate can change. The adjustment period can range from every month to every five years.
  • Index: Each ARM is tied to a different rate index to determine its interest rate. The rate on your ARM is generally the index rate plus a certain margin.
  • Rate and payment caps: Your rate and payment can increase on an ARM, but there will be a cap on how much your rate and payment can increase from their initial points.

Key Features

  • Minimum down payment: 5%
  • Minimum credit score: 620
  • DTI ratio: 36% to 50%, depending on the underwriting and credit score
  • Mortgage insurance: Private mortgage insurance (PMI) with less than 20% equity
  • Loan limits: $647,200 to $970,800, depending on location
  • Other requirements: None

Pros and Cons

Pros
  • Lower initial interest rate

  • Among lower down payments required

  • Lower costs than FHA loans

Cons
  • Unpredictable interest rate and payment

  • More difficult to qualify

  • PMI required for less than 20% down

Pros Explained

  • Lower initial interest rate: ARMs have a lower initial interest rate than fixed-rate mortgages.
  • Among lower down payments required: An ARM requires as little as 5% down, which is lower than some other types of mortgages.
  • Lower costs than FHA loans: Conventional loans, including ARMs, are generally cheaper than FHA loans.

Cons Explained

  • Unpredictable interest rate and payment: Due to the adjustable rate, ARM payments can be unpredictable. If the rate of the index or loan is tied to increases, your interest rate and payment will increase.
  • More difficult to qualify: Like a fixed-rate conventional loan, an ARM is more difficult to qualify for than certain government-backed loans.
  • PMI required for less than 20% down: Like a fixed-rate conventional loan, an ARM requires PMI as long as you have less than 20% equity in the home.

When a Conventional Adjustable-Rate Mortgage Works Best

An ARM is best for borrowers who can qualify for the stricter loan requirements of a conventional mortgage and who want to take advantage of the lower starting interest rate when compared with a fixed-rate loan. Due to the interest rate and payment risk, an ARM is ideal for those with a larger appetite for risk or those who only plan to stay in the home for less than the initial rate period.

FHA Mortgage

An FHA loan is one that’s backed by the Federal Housing Administration. This type of loan makes it easier for borrowers with poor credit to buy homes. Because these loans are backed by the FHA, they pose less risk for the lender, meaning borrowers don’t have to meet such strict eligibility requirements as conventional loans.

Key Features

  • Minimum down payment: 3.5% for a credit score of 580, 10% for a credit score of 500-570
  • Minimum credit score: 500-580
  • DTI ratio: 43%
  • Mortgage insurance: Upfront mortgage insurance of 1.75%, monthly mortgage insurance premium (MIP)
  • Loan limits: $420,680 to $970,800, depending on your location
  • Other requirements: Homes must meet certain building standards related to safety, soundness, and security.

Pros and Cons

Pros
  • Lower credit-score requirements

  • Flexible DTI requirement

  • Gift funds allowed for the down payment


Cons
  • Upfront and ongoing mortgage insurance

  • Higher down-payment requirement

  • More expensive than conventional loans

Pros Explained

  • Lower credit-score requirements: You can qualify for an FHA loan with a credit score as low as 500, which is considerably lower than the minimum for a conventional loan.
  • Flexible DTI requirement: You can exceed the 43% DTI if certain compensating factors are met, including having a history of on-time housing payments, a large down payment, sizable savings, and more.
  • Gift funds allowed for the down payment: The Department of Housing and Urban Development (HUD) explicitly allows FHA borrowers to use gifted funds for the down payment.

Cons Explained

  • Upfront and ongoing mortgage insurance: When you borrow an FHA loan, you’ll pay an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount, as well as ongoing MIP throughout the loan term.
  • Higher down-payment requirement: The down-payment requirement for an FHA loan is higher than that of a conventional loan or another government-backed loan, especially if your credit score is below 580.
  • More expensive than conventional loans: FHA loans are generally more expensive than conventional loans when you account for interest, mortgage insurance, etc.

When an FHA Mortgage Works Best

An FHA mortgage might be the right choice for someone who wants to buy a home but doesn’t have the credit score to qualify for a conventional mortgage. Keep in mind, you’ll still have to provide a down payment and meet DTI requirements.

VA Mortgage

A VA mortgage is a home loan provided by a private lender and backed by the U.S. Department of Veterans Affairs. These loans are available to current and former service members who have served for a certain number of months or were discharged for a service-connected disability. These loans provide a cheap and flexible mortgage option to military families.

Key Features

  • Minimum down payment: None
  • Minimum credit score: None
  • DTI ratio: 41%
  • Mortgage insurance: None
  • Loan limits: None
  • Other requirements: Minimum military service requirements; homes must meet certain standards and be safe, sound, and sanitary.

Pros and Cons

Pros
  • Lower eligibility requirements

  • Cheaper than other loan options

  • Can be used multiple times

Cons
  • VA funding fee

  • Not available to all borrowers

Pros Explained

  • Lower eligibility requirements: A VA loan is easier to qualify for in terms of the required credit score and down payment.
  • Cheaper than other loan options: Due to the competitive interest rates and no mortgage insurance, a VA loan can be cheaper than other loan options.
  • Can be used multiple times: Unlike certain military benefits, you aren’t limited to using a VA loan once. It’s a lifetime benefit you can use each time you buy a home.

Cons Explained

  • VA funding fee: While there is no mortgage insurance, you will have to pay a VA funding fee, which is based on your down payment and whether it’s your first VA loan.
  • Not available to all borrowers: Most borrowers won’t be eligible for a VA loan because they are only available to eligible current and former military service members and surviving spouses.

When a VA Mortgage Works Best

A VA mortgage might be the right choice for any current or former military service member buying a home. Due to the low eligibility requirements, competitive interest rates, and lack of mortgage insurance, you may find it’s a better alternative to any other mortgage you may qualify for.

USDA Mortgage

A USDA mortgage is one that’s either guaranteed by or borrowed directly from the USDA’s Rural Development department. These loans are available to low- and moderate-income borrowers in eligible areas defined as rural, helping individuals to obtain decent, safe, and sanitary housing.

Key Features

  • Minimum down payment: None
  • Minimum credit score: 640
  • Debt-to-income ratio: 41%
  • Mortgage insurance: Upfront fee up to 3.5% of the loan amount and an annual fee up to 0.5% of the average annual scheduled unpaid principal balance
  • Loan limits: $336,500 to $776,600, depending on your location
  • Other requirements: Must be in an eligible rural area, income can’t exceed 115% of the median household income

Pros and Cons

Pros
  • No down payment required

  • Funds can be used for many purposes

Cons
  • Low loan limits

  • Higher credit-score requirement

  • Strict eligibility requirements

Pros Explained

  • No down payment required: USDA loans offer 100% financing, meaning no down payment is required.
  • Funds can be used for many purposes: USDA funds can be used for home purchases, as well as builds, repairs, rehabilitation, refinancing, and more.

Cons Explained

  • Low loan limits: The minimum loan limits for USDA loans are considerably lower than those for any other type of mortgage, and start at just $336,500 for many areas.
  • Higher credit-score requirement: While the USDA doesn’t require a minimum credit score, lenders generally require a score of at least 640, which is higher than what’s required for other types of loans.
  • Strict eligibility requirements: USDA loans have strict eligibility requirements in terms of locations where they can be used, the maximum borrower income, and more.

When a USDA Mortgage Works Best

USDA loans are best-suited to low- and moderate-income borrowers in rural areas who want to buy a home but may be struggling to save up a down payment.

Jumbo Conventional Mortgage

A jumbo conventional mortgage, also known as a non-conforming loan, is one that isn’t backed by a government agency and doesn’t meet the loan limits set by the FHFA.

Because jumbo loans don’t meet conforming loan requirements, they are higher risks for lenders. They also leave more discretion to lenders when setting requirements for minimum down payments, credit scores, DTI ratios, and other factors.

Key Features

  • Minimum down payment: 20%
  • Minimum credit score: 700
  • DTI ratio: Varies
  • Mortgage insurance: None
  • Loan limits: $1 million to $2 million
  • Other requirements: 6-12 months’ mortgage payments in cash reserves

Pros and Cons

Pros
  • Higher loan limits

  • More loan flexibility

Cons
  • Higher interest rates

  • Stricter eligibility requirements

Pros Explained

  • Higher loan limits: A jumbo loan is an opportunity for those who want to borrow more than the conforming loan limits to qualify for a mortgage.
  • More loan flexibility: Jumbo loans don’t have to meet the loan requirements set by Fannie Mae and Freddie Mac, meaning lenders have more flexibility to set their own requirements.

Cons Explained

  • Higher interest rates: Due to the higher risk to the lender, jumbo loans often have higher interest rates than conforming loans, although that’s not always the case
  • Stricter eligibility requirements: Jumbo loans have stricter eligibility requirements when it comes to your credit score, down payment, cash reserves, and more.

When a Jumbo Conventional Mortgage Works Best

A jumbo loan might be the best option if you want to buy a home that exceeds the conforming loan limits set by the FHFA. Keep in mind that due to the stricter requirements of jumbo loans, they usually are most realistic for borrowers with a solid financial foundation.

The Bottom Line

Wading through the numerous options for mortgages can be overwhelming. But if you first determine which types are best for you based on your own financial situation, the kind of house you want to buy, the interest rate for which you’re eligible, loan term, and applicable fees, picking one that works well for your home purchase should become simpler.

Frequently Asked Questions (FAQs)

What are the different types of reverse mortgages?

A reverse mortgage is one that allows homeowners to take equity out of their homes in the form of cash to help with living expenses during their later years. There are three types of reverse mortgages: single-purpose reverse mortgages, proprietary reverse mortgages, and home equity conversion mortgages (HECMs).

Which types of mortgages are most risky for the lender?

Jumbo loans are the riskiest for lenders because they aren’t backed by a government agency, nor can they be purchased by Fannie Mae or Freddie Mac.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

Article Sources

  1. Fannie Mae. “Selling Guide.”

  2. Neighbors Bank. “USDA Loan Income Limits and Eligibility in 2022.”

  3. Federal Housing Finance Agency. “FHFA Announces Conforming Loan Limits for 2022.”

  4. Consumer Financial Protection Bureau. “Conventional Loans.”

  5. Consumer Financial Protection Bureau. “Understand Loan Options.”

  6. Consumer Financial Protection Bureau. "How To Decide How Much To Spend On Your Down Payment."

  7. Fannie Mae. "Selling Guide, B3-6-02, Debt-to-Income Ratios (05/04/2022)."

  8. Consumer Financial Protection Bureau. “What Is Private Mortgage Insurance?

  9. Consumer Financial Protection Bureau. “What Is the Difference Between a Fixed-Rate and Adjustable-Rate Mortgage (ARM) Loan?

  10. Federal Reserve Board. “Consumer Handbook on Adjustable-Rate Mortgages,” Pages 6-12.

  11. Federal Deposit Insurance Corp. “203(b) Mortgage Insurance Program,” Pages 2-3.

  12. U.S. Department of Housing and Urban Development. “HUD 4155.1, Mortgage Credit Analysis for Mortgage Insurance,” Pages 4-F-6-7.

  13. U.S. Department of Housing and Urban Development. “HUD 4155.1, Mortgage Credit Analysis for Mortgage Insurance,” Page 5-B-10.

  14. U.S. Department of Veterans Affairs. “VA Home Loans.”

  15. U.S. Department of Veterans Affairs. “VA Home Loan Guaranty Buyer’s Guide,” Page 7.

  16. U.S. Department of Veterans Affairs. “Debt-to-Income Ratio: Does It Make Any Difference to VA Loans?

  17. U.S. Department of Veterans Affairs. “VA Home Loan Limits.”

  18. U.S. Department of Veterans Affairs. “VA Pamphlet 26-7, Revised - Chapter 12: Minimum Property Requirements,” Page 12-3.

  19. U.S. Department of Veterans Affairs. “VA Funding Fee and Loan Closing Costs.”

  20. U.S. Department of Agriculture. “Single Family Housing Guaranteed Loan Program.”

  21. U.S. Department of Agriculture. “Section 502 Direct Loan Program’s Credit Requirements,” Page 11.

  22. USDA Rural Development. "Chapter 11: Ratio Analysis," Page 11-1.

  23. U.S. Department of Agriculture. “Upfront Guarantee Fee & Annual Fee,” Pages 7-8.

  24. U.S. Department of Agriculture. “Rural Development Single Family Housing - Area Loan Limits,” Pages 2 and 8.

  25. Penfed Credit Union. “How Is a Jumbo Loan Different Than a Conforming Loan?

  26. Chase. “How To Qualify for a Jumbo Mortgage Loan.”

  27. Federal Trade Commission. “Reverse Mortgages.”