Types of Mortgage Loans: Making the Most Out of Your Mortgage

By Nikolina Cveticanin

June 19, 2023

Buying a house is one of the turning points in anyone’s life and certainly one of the biggest purchases they’ll ever make. And as much as it’s fulfilling, finding a perfect residential property can be extremely stressful, especially if you don’t know what your options are. 

Selecting the right mortgage program is one of the crucial steps in this process, which is why we decided to let you know what types of mortgage loans exist, how they work, and what their key benefits are to help you make a smart decision.

Different Types of Mortgage Loans

The national mortgage debt keeps on pilling up, and since the pandemic, it has been on a constant rise. Statistics have shown that by April 2022, mortgage debt in the US had surpassed $11.18 trillion. These numbers prove that we must take things seriously and carefully explore all the possibilities.

If you’re a first-time home buyer, you probably don’t even know where to start looking and what to expect. So, let’s dive right into it. These are the most common types of mortgage loans. 

Conventional vs. Non-Conventional Loans

All mortgage loans can be split into two main categories: conventional and non-conventional loans.

Conventional Loans	Non-Conventional loans
Conforming conventional loans Non-conforming conventional loans Fixed-rate mortgages/ Adjustable-rate mortgages Portfolio loans	FHA loans VA loans USDA loans HUD Section 184 loans

A conventional loan is any mortgage that has been issued by a private mortgage lender and isn’t backed up by the federal government. These loans follow the guidelines based on the set of standards set by Fannie Mae and Freddie Mac, the federally backed home mortgage companies created by the US Congress. A conventional loan is the most popular type of mortgage loan in the US for those borrowers who are able to qualify for it.

Alternatively, non-conventional loan offers are tailored for borrowers with poor credit scores who can’t otherwise qualify for conventional loans. They also usually require private mortgage insurance, as they are considered riskier. Non-conventional loans are backed by government agencies and include loans supported by the Federal Housing Administration (FHA), Veterans Administration (VA), and the US Department of Agriculture (USDA). 

Conventional Mortgage Loans

Generally, conventional mortgage loans require a credit score of at least 620 and a 3% down payment. However, if a borrower makes a ​​down payment of 20%, they are not obligated to pay the private mortgage insurance, which is a big plus. Now that we know the basics, let’s check out the different types of conventional mortgage loans and how they work.

Conforming Conventional Loans

Conforming loans are those that fall under the loan limits set by the Federal Housing Finance Agency and meet additional loan standards set by Fannie Mae or Freddie Mac.

These loans can not exceed a conforming loan limit determined by the FHFA, which is how they got the name in the first place. The limit changes yearly and is determined based on the House Price Index report that tracks the average increase in home values over the previous year. For 2022, the conforming loan limit is $647,200 for most parts of the US.

Non-Conforming Conventional Loans

Non-conforming loans, also known as jumbo loans, exceed the limit set by the FHFA or use standards different from those set by Fannie Mae and Freddie Mac. Out of all types of conventional mortgage loans, these are the riskiest ones as they go over the maximum loan limit. That is why they usually have strict qualification requirements. 

Fixed-Rate Mortgages

Fixed-rate mortgages have the same interest rate throughout the life of the loan. And that’s their main advantage. You always know your rate, so there will be no surprises regardless of external economic conditions.

However, there is one principal thing to keep in mind. If you choose to go for a fixed-rate mortgage with a longer repayment period, you will have a higher interest rate than you would if you opt for a short-term loan. 

Adjustable-Rate Mortgages

Adjustable-rate mortgages are the opposite of fixed-rate mortgages, and their interest rates can vary a fair bit over the span of the loan term. An adjustable-rate mortgage usually has an introductory period with a lower interest rate, after which the rate increases. 

As much as that initial interest rate may seem tempting at first glance, you should know that it most certainly will go up as time goes on. With that in mind, you might want to read up on the fine print and calculate total potential costs or check what other types of mortgage loans are available.

Portfolio Loans

Portfolio loans are a type of mortgage originated by the portfolio lender. Instead of selling the mortgage to another company, the lender issues the loan and keeps it within their range of investment holdings. This way, the mortgage doesn’t have to meet the rules set by Fannie Mae and Freddie Mac, making it easier for borrowers to qualify. 

Non-Conventional Mortgage Loans

We have already noted that non-conventional mortgages are made for borrowers with low income or who wish to apply for a loan with a low down payment or none at all. 

According to the recent housing statistics, the average down payment for a new home in 2020 was $59,880. That is far above the price range of many US citizens, who instead had to look for cheaper alternatives. 

Non-conventional mortgages are usually used by borrowers who were denied conventional loans due to insufficient cash reserves, a history of bankruptcy, or because they are self-employed. So, let’s see what types of government mortgage loans there are.

FHA Loans

FHA loans are the ones insured by the Federal Housing Administration. This means that the FHA doesn’t issue them directly, but if you default on your mortgage, the agency will compensate the private lender. Since it is less risky for them, mortgage lenders usually offer more favorable terms here than with conventional mortgages.

To qualify for the FHA loan, you should have a credit score of at least 500. If your score is between 500 and 579, you will likely have to make a down payment of 10%. But, if it is 580 or higher, your down payment can be as low as 3.5%. Note that all Federal Housing Administration loans require mortgage insurance, so you should also plan for that extra cost.

VA Loans

VA loans are backed up by the US Department of Veterans Affairs and are meant to help military service members, veterans, and their eligible family members find a home. Similar to getting an FHA loan, the federal government will compensate the lender if you default on your VA loan monthly payments. However, there are some differences. 

If you’re after the types of mortgage loans with no down payment requirements, the VA loans might be an excellent choice, as they require no upfront cash and don’t have mortgage insurance. You are only required to cover the VA funding fee, which must be paid upfront. 

USDA Loans

If you’re considering purchasing a residential property in a rural area, a USDA loan might be just what you are looking for. The US Department of Agriculture offers these government-backed mortgage programs for people with low and middle incomes. The best thing about USDA loans is that they usually don’t require any down payment and have fixed interest rates.  

To qualify for a USDA loan, the borrower needs to live in an area with up to 35,000 people and can’t make more than 115% of the area’s median income. If you meet all of these criteria, you can apply for the mortgage directly with the USDA Rural Development office.

HUD Section 184 Loans

Lastly, there’s another type of mortgage loan for those with bad credit, the HUD Section 184 mortgage. These mortgages are guaranteed by the HUD’s Office of Native American Programs. They are designed for American Indian and Alaskan Native families, Alaskan villages, tribes, or tribally designated housing entities struggling to purchase a home.

The mortgages don’t have any requirements in terms of minimum credit score and usually come with a low down payment. However, there are some limitations borrowers should be aware of. HUD Section 184 loans are limited to single-family housing and fixed-rate loans of up to 30 years.

Final Thoughts

Now that you’re more familiar with all the mortgage types on offer, you should have a much easier time picking one. Just make sure to do your due diligence to find a property that suits your needs the best. Remember to read the fine print and make timely mortgage payments to avoid any surprises in the form of additional costs.