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Our goal here at Credible 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

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
Lifetime payment amount: If you took out a $300,000 loan with an interest rate of 3.62% and a 30-year loan term, you could expect to pay $492,232 in total over the life of the loan.

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%
Lifetime payment amount: Typically, jumbo loan interest rates are fairly competitive. With that in mind, if you were to take out a $600,000 loan at an interest rate of 3.68% and a 30-year loan term, you could expect to pay $991,769 in total.

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)
Lifetime payment amount: The average FHA interest rate is 3.43%. If you took out the same $300,000 loan at that interest rate with a 30-year loan term, you could expect to pay $480,758 in total.

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
Lifetime payment amount: At an average interest rate of 3.30%, if you took out the same $300,000 mortgage with the same 30-year loan term, you could expect to pay $472,992 in total over the life of the loan.

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
Lifetime payment amount: The average USDA loan has an interest rate of 3.5%, which makes that $300,000 loan with a 30-year loan term cost $484,968 in total.

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.

Lifetime payment amount: For example, at an average interest of 2.87%, the total payment amount for that $300,000 loan with a 10-year loan term would be $345,463.

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.

Lifetime payment amount: At an average interest rate of 3.07%, that $300,000 loan with a 30-year term would result in a total payment of $459,420.

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.

Lifetime payment amount: As stated above, if you took out a $300,000 loan with an interest rate of 3.62% and a 30-year loan term, you could expect to pay $492,232 in total over the life of the loan.

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.

Lifetime payment amount: The average interest rate for a 5/1 ARM mortgage, or a mortgage that has a five-year introductory-rate period before adjusting annually, is 3.45%. At that rate, the $300,000 loan with the 30-year loan term would result in a total payment of $481,959.

Which mortgage loan is best for me?

Loan typeLoan term
(years)
Average rateDown payment requiredInsured by
Conventional10, 15, 20, 303.62%3%Private
Jumbo15, 303.68%10% - 20%Private
FHA15, 303.43%3.5% - 10%Government
VA15, 303.30%No down payment requirementGovernment
USDA15, 303.50%No down payment requirementGovernment

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.

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About the author
Tara Mastroeni
Tara Mastroeni

Tara Mastroeni is an authority on real estate and a contributor to Credible. Her work has been featured in Forbes, Fox Business, Business Insider, and more.

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