Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders, all opinions are our own.
When you’re in the process of buying a home, there are many different types of mortgage loans to choose from, which can feel overwhelming. But if you do your due diligence, specifically around nailing down your monthly budget, down payment amount, and credit score, you’ll have a better idea of which type of loan will work best for you.
To help you decide which is right for you, here are the most common types of mortgages:
- Conventional mortgage loans
- Jumbo mortgage loans
- Unconventional mortgage loans
- Fixed vs. adjustable-rate mortgages
- Which mortgage loan is best for me?
Conventional mortgage loans
These loans are a good match for borrowers who have a strong credit history, stable employment history, minimal debt, and enough funds to put down at least 3%. Unlike government-backed loans, they can be used to finance nearly any type of property, including primary residences, vacation homes, or investment properties.
Usually, when people talk about conventional loans, they’re referring to conforming loans, or loans that meet the limits set forth by Fannie Mae and Freddie Mac, the two agencies that buy most of the mortgages in the U.S. As of 2020, in order to be considered a conforming loan, the loan must be less than $510,400 or, if you’re in a high-cost area it will be less than $765,600.
Requirements:
- Credit score of at least 620
- Down payment of at least 3%
- Debt-to-income ratio (DTI) that’s less than 45%
- Likely have to pay private mortgage insurance (PMI) if you put down less than 20% (but it may be able to be canceled once you own a 20% stake in the home)
- Verification of your income, assets, liabilities, and down payment
Jumbo mortgage loans
Jumbo loans are larger than the conforming loan limits set by Fannie Mae and Freddie Mac. In 2020, this means any loan that’s larger than $510,400 is considered a jumbo loan.
These loans are best for higher-end borrowers who are looking into buying more expensive homes. Jumbo loan borrowers must have excellent credit scores, minimal debt, and a sufficient amount of savings.
Requirements:
- Credit score of at least 660 (though, in many cases a score of at least 700 will be required)
- Debt-to-income ratio of less than 45%
- Down payment of at least 10% to 20%
Unconventional mortgage loans
Unlike conventional loans, unconventional loans are insured by the federal government. Mortgage insurance protects the lender from taking a loss if you default and, in exchange for that reassurance, lenders are able to offer more flexible qualifying standards for these loans.
FHA loans
FHA loans are backed by the Federal Housing Administration (FHA). They’re meant for borrowers with smaller down payments and lower credit scores, who are unable to be approved for a conventional loan. Many first-time homebuyers use this type of loan.
Requirements:
- Credit score of at least 580 (3.5% down payment)
- Credit score of at least 500 (10% down payment)
- Debt-to-income ratio of less than 43%
- The home must be your primary residence and, in most cases, can’t be a condo
- Must pay PMI upfront and annually (if you’re putting less than 10% down)
VA loans
VA loans are backed by the Veteran’s Administration and are meant for active-duty military members, reservists, and veterans.
Requirements:
- Credit score around 620 (varies per lender)
- Can be used for primary residences only
- No minimum credit score requirement (lenders can make that determination case-by-case)
- No PMI requirement
- No down payment required
- A funding fee is charged, but that can be rolled into your loan, along with your closing costs
USDA loans
USDA loans are backed by the United States Department of Agriculture. They’re meant to help low-to-moderate income borrowers become homeowners while also encouraging the development of rural areas.
Requirements:
- Credit scores as low as 620 are accepted (most lenders require 640+)
- Must meet certain income limits to be deemed eligible
- Must purchase a home in a USDA-eligible area
- No down payment required
- PMI required
Fixed vs. adjustable-rate mortgages
Fixed-rate mortgage loans
With a fixed-rate mortgage, the interest rate stays the same over the life of the loan, which allows borrowers the comfort of knowing what they can expect for their monthly expenses once they buy a home. There are three types of fixed-rate loans.
10-year
Those with a steady income, who don’t have other significant debts are the best candidates for a 10-year, fixed rate loan. Since the loan amount is shorter, the monthly payment is often higher, but to compensate, these loans are offered at competitive mortgage interest rates.
Find Out: How to Get the Best Mortgage Rates
15-year
People who anticipate an increase in income and a decrease in debt in the future are decent candidates for a 15-year mortgage. Again, since the loan term is shorter, the monthly payment will be higher than it would be with a 30-year option.
30-year
Most mortgage loans have a 30-year loan term. If buying a home is a stretch or you otherwise want to keep your monthly payment as low as possible, you should seriously consider this loan term.
Adjustable-rate mortgage loans
Unlike fixed-rate options, adjustable-rate mortgages have variable interest rates. Typically, these loans come with a lower, introductory-rate period upfront. However, once that introductory-rate period is over, the rates adjust according to the current market rate.
Which mortgage loan is best for me?
| Loan type | Loan term (years) | Average rate | Down payment required | Insured by |
|---|---|---|---|---|
| Conventional | 10, 15, 20, 30 | 3.62% | 3% | Private |
| Jumbo | 15, 30 | 3.68% | 10% - 20% | Private |
| FHA | 15, 30 | 3.43% | 3.5% - 10% | Government |
| VA | 15, 30 | 3.30% | No down payment requirement | Government |
| USDA | 15, 30 | 3.50% | No down payment requirement | Government |
There are many types of mortgages to choose from — but now, you should have a better idea of which type of loan might be the best fit for you.
Credible makes getting a Streamlined Pre-Approval Letter for a mortgage easy compared to other lenders. We currently offer conventional and jumbo mortgages. You can generate a Streamlined Pre-approval Letter instantly and you can complete the whole process online in just a few minutes.
