5 types of home loans to consider when mortgage shopping

Along with the thrill of home shopping comes the daunting task of finding a mortgage to help pay for it. Before you become disheartened, keep this in mind: With several types of loans available, you may have more ways to qualify than you think. Each has its own down payment, credit score, and borrowing requirements. 

Understanding your loan options can help you shop with confidence and secure the best type of financing for your needs.

Types of home loans

These are the key categories of loans homebuyers should be familiar with when looking for a mortgage:

• Conventional: A conventional home loan is the most common type of mortgage. It may be right for you if your credit score is at least 620 and you wouldn’t benefit from a government loan. The Federal Housing Finance Agency sets limits for how much you can borrow with a conventional conforming loan. In 2024, the limits for a single-family or one-unit home are $766,550 in most counties.
• Jumbo: If you want to borrow more than the conventional conforming limit, you can get a conventional conforming jumbo loan for up to $1,149,825 for a single-family home in high-cost counties. For even larger purchases, lenders offer nonconforming jumbo loans.
• Government: This category includes FHA loans for borrowers with credit scores below 620, USDA loans for borrowers in rural areas, and VA loans for military service members, veterans, and surviving spouses. The U.S. government guarantees a portion of the borrower’s principal to encourage lenders to offer mortgages to people who might otherwise have trouble qualifying. 
• Fixed-rate mortgage: Any of the above categories of loans will typically have a fixed interest rate for the life of the loan. A fixed-rate loan provides financial predictability: Your monthly principal and interest payment will be the same each month.
• Adjustable-rate mortgage: Conventional, government, and jumbo loans can also have an adjustable interest rate that stays the same for the first few years, then periodically changes based on market conditions. 

Learn More: VA loan vs. conventional loan: How to choose

Conforming vs. nonconforming loans

Here’s a quick overview to help you understand the differences between conforming and nonconforming mortgages.

Other types of mortgage loans

While less common, these mortgage types can be a good fit for certain borrowers:

• Piggyback loans: These loans allow you to finance 10% of the purchase price with a second mortgage to supplement your down payment. If you only have 10% saved for your down payment, you can use a piggyback loan to help you make a 20% down payment and avoid private mortgage insurance (PMI). Low-down-payment loans typically require mortgage insurance.
• Physician loans: These loans are for doctors, dentists, optometrists, and certain other medical professionals who are actively or about to start practicing, completing a residency, or completing a fellowship. Physician loans account for characteristics common to these borrowers, such as high student debt, limited down payments, and high earning potential.
• Balloon mortgages: With a balloon mortgage, you pay interest but no principal or less than the fully amortized amount of principal with each monthly mortgage payment. After a certain number of years, the remaining principal balance is due as a lump sum called a balloon payment.
• Nonqualified mortgages: Specialty lenders offer these home loans to borrowers with less common situations that require more creative financing. Physician loans and balloon mortgages fall into this category. So do bank statement loans, large jumbo loans, investment property loans based on a property’s cash flow, and loans for borrowers with a recent bankruptcy or foreclosure. 

How to choose the right mortgage for you

There isn’t a single best type of mortgage, which is why lenders offer different types for different borrowers. Here’s how to choose a home loan that will meet your needs:

1. Know your credit score: If you have a lower credit score (below 620), you’ll be limited to FHA loans and nonqualified mortgages (also called non-QM loans). If you have time to work on your score before getting a mortgage, focus on getting above 620 to increase your options. If not, plan to focus on FHA and non-QM loans, but be prepared to pay mortgage insurance premiums for the life of the loan with an FHA loan or pay a higher mortgage rate and fees with a non-QM loan.
2. Find out what special loan programs you may be eligible for: If you have qualifying military service, you may be eligible for a VA loan. If you’re far from the ideal loan candidate and want to buy in a rural area, you may be eligible for a USDA loan. If your income is less than 80% of the area median for your household size, you may be eligible for down payment assistance. These programs offer significant advantages, so you’ll want to consider them if you qualify.
3. Take stock of your cash reserves: Estimate what your total monthly living expenses will be after you get your mortgage and multiply the result by three. Next, calculate how much money you can afford to take out of your savings for a down payment and closing costs — or factor in what you may qualify for through one of the programs mentioned above. 
4. Know your target price range: If you want to borrow more than the conforming loan limit in your area, plan to apply for a jumbo loan, which may also mean saving at least 10% of the purchase price for your down payment. Otherwise, you’ll want to consider conventional and government loans first because they’re widely available.
5. Understand the risks and additional costs: Low-down-payment conventional loans and all FHA loans require borrowers to pay for mortgage insurance that protects the lender in case the borrower defaults. Making a small down payment also puts you at risk of owing more than your real estate is worth if home prices fall, which could be a problem if you need to move or want to refinance. Adjustable-rate loans have future payment uncertainty. Mortgages with higher interest rates can be expensive in the long run. There’s no guarantee you’ll be able to refinance into a stable fixed-rate mortgage or get a lower rate.

Find out: How to buy a house in 2024

Frequently asked questions

What happens if I get denied a mortgage?

Your mortgage lender will be able to tell you the specific reasons why you were denied a mortgage. It could be as simple as accurate information on your application or due to more complicated factors, like your credit history or income. Another possibility is that your financial profile doesn’t match the lender’s risk tolerance.

Whatever the reason, work on fixing the problems so a lender will approve you at a lower interest rate. 

How much should I have for a down payment?

Down payment requirements depend on the type of home loan you’re seeking.

Certain loans — like VA or USDA mortgage loans — can be extended to you without a down payment. Conventional mortgages require 3% down, and FHA mortgages require 3.5% down.

If making a substantial down payment is difficult due to income constraints, you may qualify for a down payment assistance program through your state or lender.

If your income is low to moderate for the area where you want to buy, you may qualify for down payment assistance through a state or lender program. 

What’s the difference between a first and second mortgage?

The main difference between a first and second mortgage is who has first rights to the proceeds if a home is foreclosed. 

If a borrower ends up in foreclosure, the proceeds from the forced sale of the home go to the first mortgage lender before the second mortgage lender gets anything. First mortgages are, therefore, less risky for lenders and have lower rates than second mortgages. For example, a home equity loan would be a second mortgage if you took it out while still paying off your first mortgage — the one you bought your home with.