Your home is likely one of your most significant assets and expenses, making it crucial to choose the right kind of mortgage. Determining the right mortgage factors into whether you’ll qualify for the loan and what you’ll pay—each month and over the loan’s life.
We’ll explain why there are so many types of mortgages, the most common mortgages you might consider, and how to determine which one is best for you.
In this guide:
- Why are there so many types of mortgages?
- Conventional mortgage
- FHA loans
- Jumbo loans
- VA loans
- USDA loans
- Physician mortgage loans
- No-income-verification mortgage
- Shared appreciation mortgage
- Investment property loans
- Low down-payment mortgage
- Adjustable-rate mortgage
- Fixed-rate mortgage
- Is a bridge loan a mortgage?
- What is the best type of mortgage?
Why are there so many types of mortgages?
No two people, properties, or financial situations are identical. Different types of mortgages can meet the needs of disparate people and circumstances.
Furthermore, financial institutions and other mortgage lenders need a funding source to issue mortgages. Lenders use part of the money you place on deposit with them to fund the loans they make. However, this limits the available funding.
To address this funding issue, many lenders sell some or all of the mortgages they make to investors in bundled groups of loans with similar characteristics. For example, a lender might sell conforming conventional mortgages to Fannie Mae and Freddie Mac in bundled packages.
Also, the government created several loan programs (e.g., FHA, VA, and USDA loans) to make mortgages more accessible for specific groups of people. The government promises to cover part of your loan if you don’t pay as agreed, so lenders might be willing to grant loans they would otherwise consider too risky.
A conventional mortgage is a home loan a government program or entity doesn’t back. Rather than a specific government program, most conventional mortgages are backed by Fannie Mae or Freddie Mac—government-sponsored mortgage companies.
Conventional home loans meeting the standard requirements of Fannie Mae and Freddie Mac are called conforming mortgages. Conversely, conventional home loans that don’t meet Fannie Mae’s and Freddie Mac’s standards are called non-conforming mortgages. More details about these loans are:
- Conforming mortgages are sold to Fannie Mae or Freddie Mac by your lender at closing. Your original lender may continue to service your loan (e.g., send monthly statements and collect payments), but it’s protected from losses if you don’t pay your mortgage as agreed.
- Non-conforming mortgages aren’t sold to Fannie Mae or Freddie Mac because the loans don’t meet their standards. Instead, the lender establishes the requirements for non-conforming mortgages, so they vary widely. It’s essential to shop around for this type of mortgage.
In many cases, conforming conventional loans cost less than other mortgages due to the strict approval criteria. Even so, qualifying for a conforming versus government-backed mortgage can be more difficult, as you may need a better credit score, lower debt-to-income ratio (DTI), and larger down payment.
A conforming loan backed by Fannie Mae or Freddie Mac can be a terrific option if you meet the following basic criteria:
|Maximum conforming loan limit*||$726,200 – $1,089,300|
|Minimum down payment or equity||3% – 25%|
|Minimum credit score||620 – 720|
|Maximum DTI||36% – 45%|
*Note: The maximum conforming loan limits shown are for one-unit properties in 2023. Conforming loan limits vary based on the region of the U.S. where your home is located and how many living units your residence contains (e.g., one to four units).
If you don’t meet the basic conforming loan criteria, you might consider a non-conforming loan or another type of mortgage. For example, if you exceed the conforming loan limits, you might consider a jumbo loan. If you don’t meet the credit criterion, you might consider an FHA loan.
No matter which type of mortgage you choose, first evaluate whether you can afford it. A mortgage calculator can help. Plus, shop around for the best possible rates and terms.
An FHA loan is a government-backed home loan designed to make mortgages more affordable and accessible. FHA loans feature down payments as low as 3.5% of the purchase price and more accessible qualifications than other types of mortgages.
The Federal Housing Administration (FHA) doesn’t offer direct FHA loans. Instead, you can get FHA loans from approved mortgage lenders. The FHA guarantees your lender it will cover a portion of your loan if you don’t pay as agreed, so qualifying for this type of loan is easier.
The general criteria to qualify for an FHA loan are:
|Maximum FHA loan limit*||$472,030 – $1,089,300|
|Minimum down payment or equity||3.5% – 10%|
|Minimum credit score||500 – 580|
|Maximum DTI||40% – 50%|
*Note: Maximum FHA loan limits shown above for one-unit properties as of 2023. These limits vary based on your home’s location in the U.S. and how many living units it contains.
FHA loans are considered riskier than other types of loans, so they often cost more. If you have good credit and can make a down payment of 10% or greater, you may pay less with a conventional loan versus an FHA loan.
When shopping for a mortgage, you should compare lenders and loan types. You’ll be better equipped to choose the type of mortgage and lender with the best possible rates and terms for your needs and circumstances.
A jumbo loan is a large mortgage above the conforming loan limits set by the Federal Housing Finance Agency (FHFA) for conventional loans or by the U.S. Department of Housing and Urban Development (HUD) for FHA loans.
The 2023 range of conforming loan limits for one-unit properties are:
- Conventional loans: $726,200 – $1,089,300
- FHA loans: $472,030 – $1,089,300
The loan amounts are larger than other types of loans, so mortgage lenders consider these types of loans riskier than their smaller counterparts. To compensate for the additional risk, you may need a bigger down payment, better credit score, and lower DTI to qualify.
Standard eligibility requirements for jumbo loans include:
|Minimum down payment or equity||10% – 20%|
|Minimum credit score||680 – 720|
|Maximum DTI||36% – 43%|
Every mortgage lender can set its jumbo loan eligibility criteria, so the exact standards you must meet to qualify for a jumbo loan can differ. Shopping around and comparing lenders is essential to get the best rates and terms.
A VA loan is a home loan available to military service members, veterans, and eligible surviving spouses. The U.S. Department of Veterans Affairs (VA) doesn’t provide direct VA-guaranteed loans. Instead, you’ll get this government-backed mortgage from a private lender.
To get a VA loan, you must provide your lender with a Certificate of Eligibility (COE) from your military branch. The COE shows the lender you qualify based on your military service and status.
Besides qualifying based on your status as a military service member or veteran, other VA home loan qualifications include:
|Maximum loan amount||None||—|
|Minimum down payment or equity||0%||Lenders may require down payments at their discretion.|
|Minimum credit score||None||Lenders must evaluate your entire credit profile; some may set their own minimums.|
|Maximum DTI||None||Compensating factors required with DTIs over 41% (e.g., more equity, better credit profile).|
Qualifying for a VA loan is easier than certain other mortgage types—and private mortgage insurance (PMI) isn’t required if you have a down payment or equity of less than 20%. PMI often costs 0.5% to 1.0% of your loan amount each year, so this can save you thousands of dollars.
Even so, it’s essential to compare and contrast multiple VA lenders before deciding. You’ll be better equipped to find the best rates and terms for your unique situation and needs.
If you live in a rural region of the U.S., you might consider a USDA home loan. The USDA offers these home loans to people with low or income relative to income in their area. Approved lenders also offer government-backed USDA loans to those with moderate income.
Details about the two most common USDA mortgage programs for single-family properties to very-low-to-moderate income people in rural America are below:
|Direct Loan Program||Guaranteed Loan Program|
|Income requirements||Low to very low||Moderate|
|Minimum credit score||No specific score||No specific score|
|Maximum repayment term||33 years||30 years|
|How to apply||Directly with the USDA||With an approved lender|
When you apply for a USDA loan, rather than needing to meet a specific credit score to qualify, your entire credit profile and history are evaluated to determine creditworthiness. This evaluation aims to assess your ability and willingness to repay the mortgage.
- Ability to repay is whether you can afford your mortgage and other debt payments based on an income evaluation. You’ll need to show you can afford the payments and that your income is steady and reliable.
- Willingness to repay is how likely you are to repay the loan, given your credit history. If you don’t have a traditional credit history or score, the evaluation may include nontraditional credit, such as rent payments, utilities, insurance, or phone bills.
A USDA loan can be ideal for individuals who live in a rural area and don’t earn a high income. It’s also desirable for people without a traditional credit history since the USDA uses nontraditional credit history in its evaluation. Contact the USDA or an approved lender to find out more.
Physician mortgage loans
A physician mortgage loan is a specialized home loan program some lenders offer to doctors. The goal is to accommodate the physician’s financial condition. Many doctors leave medical school with high student loan balances, which can make getting a mortgage more difficult.
Not all banks or mortgage lenders offer physician home loan programs, and the criteria can differ between lenders. Even so, to qualify for a physician mortgage loan, you often need to meet criteria such as the following:
- Employment: Proof of employment as a doctor or offer letter with a near-term start date
- Current debt: Little to no debt other than student loans
- Credit score: 700 or better
Lenders that offer physician mortgage loans understand the risks associated with lending to doctors, so it’s often easier to qualify for these types of loans. Not only do lenders often exclude student loans when evaluating income, but you can often get approved with just a job offer.
If this is your situation, ensure you evaluate whether you can afford the payment on your new home and service your student loans. Lenders offering these programs use the upstanding reputation of the physician community when making the loans and count on borrowers to behave similarly.
Shop around to ensure you’re finding the best deal. If you don’t have a lot of student loans and have good credit, you might find the rates are better for conventional or jumbo loans. Comparison shopping can help you find the best loan.
You may be able to get a no-income-verification mortgage from specific lenders, but this type of home loan is rare. If offered, you must prove to your lender that you can afford the loan with recent bank account or brokerage statements.
In the early 2000s, stated income or no-income-verification mortgages were popular among self-employed and other borrowers. With the fallout from the Great Recession, these types of loans are uncommon because they often carry a high level of risk.
To qualify for a no-income-verification mortgage, you might need to meet the following criteria:
- Excellent credit score (700 or better)
- Low to moderate debt-to-income ratio (no more than 43%)
- Significant verified liquid assets, such as cash or marketable securities
Even if your lender does not require documentation to verify your income, it’s important to provide truthful information. If you don’t repay the loan as agreed, the lender might use the information on your loan application to investigate what went wrong.
Providing accurate information and asking for an amount you can afford will set you up for success and help you avoid severe legal consequences, such as mortgage fraud accusations, if something goes wrong with your loan.
Shared appreciation mortgage
A shared appreciation mortgage is a type of loan where you agree to give your mortgage lender a portion of your home’s value should it increase (i.e., appreciate) over time. When you pay off the loan, your lender collects the outstanding principal and its share of your home’s appreciated value.
In many cases, you can only get a shared appreciation mortgage from your lender via a mortgage modification. However, your local governments might offer shared appreciation mortgage programs to help counteract high housing costs.
- Mortgage modification: Your lender may offer a shared appreciation mortgage modification to help you avoid foreclosure. The concession it receives for lowering your interest rate and monthly payment is a future payoff from the appreciated value of your home.
- Local government programs: Certain municipalities offer shared appreciation mortgages in conjunction with down payment assistance programs. Two examples of areas with these types of mortgage programs are Douglas County, Colorado, and San Francisco, California.
By agreeing to share some of your home’s future value appreciation with the lender, you may get a better interest rate and lower payments than with other mortgages. While this type of program is not common, it can be a way to make homeownership more affordable.
Investment property loans
An investment property loan is a mortgage on a property that’s not your primary residence. Instead, you lease it to third-party tenants. Lenders often consider your income and the rental income from the investment property to approve this type of loan.
To qualify for an investment property loan, you often need to have a:
- Sizeable down payment (at least 20%)
- Good credit score and history
- Low to moderate debt-to-income ratio
For someone with just a few investment properties, qualifying for an investment property loan is similar to qualifying for a mortgage on your primary residence.
However, financing an extensive portfolio of investment properties might be treated like a commercial loan. Besides evaluating whether you can afford the payments, lenders assess the income from each property. This includes analyzing the lease agreement’s terms, the vacancy level, and the property’s characteristics.
Even if you only have a few investment properties, you may benefit from speaking with a lender specializing in this financing type. Not only might the lender direct you to the best type of investment property loan, but it can share factors you may want to consider as your portfolio grows.
Low down-payment mortgage
A low down-payment mortgage is a home loan that allows a down payment of less than 20%. Lenders often prefer sizable down payments, which they consider less risky. This is based on the premise that larger down payments may lead to lower mortgage default rates.
If you don’t have a 20% down payment, you might consider the following options:
- Conventional loans
- Jumbo loans
- FHA loans
- VA loans
- USDA loans
You must often pay for private mortgage insurance if you don’t have a down payment of at least 20%. However, PMI isn’t always required. For example, it isn’t required on VA loans.
Be sure to ask your lender whether PMI is required, as because it could add up to 1% per year to your loan payment.
An adjustable-rate mortgage (ARM) is a mortgage with a variable interest rate versus a fixed rate. With an ARM, your interest rate will change at set intervals. Your interest rate and monthly payment will increase or decrease, depending on how interest rates change.
Since you, the borrower, take on interest rate risk with an ARM, you’ll often get a lower initial interest rate than you might get on a comparable fixed-rate mortgage. Even so, you may pay more interest in the long run with an ARM if interest rates increase.
Before getting an ARM, ensure you’re comfortable with your rate changing. If this idea makes you uncomfortable, you may be better off choosing a fixed-rate mortgage.
A couple of other situations when it makes sense to consider an ARM include when:
- You plan to sell the home before the rate adjusts. If you don’t plan to stay in the home for long, you might save money by choosing an ARM. However, if your plans change, keep in mind your rate will adjust. Consider this potential before making a decision.
- You think interest rates will decrease in the future. If you got your mortgage when rates were high, you might get a lower rate during your ARM’s adjustment period. This can allow you to reduce your rate without refinancing your mortgage. However, consider the risk that rates continue to rise.
You might get a lower initial rate, but consider how rates might change and what it means to your mortgage payment before you get an ARM. Your loan documents will include details about when and how rates might change, so review these before getting the loan.
A fixed-rate mortgage is a home loan whose interest rate doesn’t change for the entire loan term. This makes your principal and interest (P&I) payments and total borrowing costs easy to calculate and predict. It also protects you from rising interest rates.
The primary drawback to a fixed-rate mortgage is you may be locked into a higher-than-market rate if interest rates decrease. In this situation, you may be able to refinance your mortgage to get a reduced rate.
However, if you choose to refinance, be sure to evaluate whether the savings from the rate reduction outweigh the refinancing costs (e.g., origination, application, appraisal, and closing fees).
Is a bridge loan a mortgage?
A bridge loan secured by your home is a short-term mortgage that provides financing you can use to bridge the gap between when you need funds and when you can get a permanent mortgage (e.g., six months to a year). Bridge loans are also called swing loans or gap loans.
You might get a bridge loan to finance a new home while you wait for your old home to sell. To qualify for a bridge loan, you must typically:
- Need to borrow 80% or less of your current home’s value
- Agree to get the new permanent mortgage with the bridge loan lender
- Demonstrate that you can afford the payment on the permanent loan
- Have good to excellent credit
Remember, you must repay the bridge loan even if the event that caused the funding need doesn’t come to fruition. So before getting a bridge loan, ensure you can repay it, and have a contingency plan (e.g., refinancing your mortgage) if the event you’re waiting for doesn’t happen.
Note: Bridge loans can assist with needs other than financing the gap for transactions related to your home. For instance, businesses sometimes use bridge loans for funding needs. If the bridge loan doesn’t give your lender rights to your property if you don’t repay it, it’s not a mortgage.
What is the best type of mortgage?
The best type of mortgage is the one that offers you the right financing for your unique financial situation. Every property and person is unique, so there is no one-size-fits-all mortgage.
The best type of mortgage depends on:
- Your financial situation. If you have good credit and a large down payment, you can get almost any type of mortgage. People with credit issues or smaller down payments need a lender who can help with these situations.
- Where you live and your characteristics. Some mortgages are designed for people who meet certain criteria, such as meeting income or loan size thresholds for their areas, serving in the military, or even being a doctor. Depending on your finances, you might get better rates and terms with these loans.
- Your risk tolerance. When getting a mortgage, you need to decide how much risk you’re willing to take. For example, if you want to know your payment will never change, a fixed-rate mortgage is likely best. To benefit from potential rate reductions, you might consider an ARM.
- Why you need the money. If you only need the money for a short time, you may consider this when choosing a mortgage. For example, if you sell your home before the rate adjusts on an ARM, you might benefit from lower interest costs.
A mortgage is a personal decision. By comparing lenders and mortgages, you can choose the one that’s best for your needs. Also, it’s common for lenders to offer many mortgage types. The best mortgage lenders will help you find the one that’s right for you.