Mortgage loan types explained

1. Conventional loans

Conventional loans are mortgages not insured or guaranteed by the federal government. They're originated by private lenders and most are sold to Fannie Mae or Freddie Mac — the government-sponsored enterprises that set the qualification standards most lenders follow.

Key requirements:

• Minimum credit score: 620 (740+ for best rates)
• Down payment: 3% (first-time buyers via Fannie/Freddie programs), 5% standard, 20% to avoid PMI
• DTI ratio: generally 43–45% max
• Loan limits (2024): $766,550 for most areas; higher in high-cost markets

Conventional loans are the most flexible — they can be used for primary residences, second homes and investment properties. PMI is required below 20% down but can be canceled once you reach 20% equity, unlike FHA's mortgage insurance which is often permanent.

2. FHA loans

FHA loans are insured by the Federal Housing Administration, which allows lenders to approve borrowers with lower credit scores and smaller down payments than conventional loans allow. The FHA doesn't lend money directly — it insures the loan, protecting the lender if you default.

Key requirements:

• Minimum credit score: 580 (3.5% down); 500–579 (10% down)
• Down payment: 3.5% with 580+ score
• DTI ratio: up to 57% with compensating factors
• Loan limits (2024): $498,257 in most areas; higher in high-cost markets

Mortgage insurance: FHA requires an upfront MIP of 1.75% of the loan (added to the loan balance) plus an annual MIP of 0.55–1.05% depending on loan size and term. If you put down less than 10%, MIP lasts for the life of the loan — the main reason to refinance into a conventional loan once you have enough equity.

3. VA loans

VA loans are guaranteed by the Department of Veterans Affairs and available only to eligible veterans, active-duty service members, and surviving spouses. They're arguably the best mortgage product available — no down payment, no PMI and competitive rates.

Eligibility: Generally requires 90+ days active duty during wartime, 181+ days during peacetime, 6+ years in the National Guard/Reserves, or being the surviving spouse of a service member who died in service or from a service-connected disability.

Key features:

• 0% down payment required
• No private mortgage insurance (PMI)
• No minimum credit score set by VA (lenders typically require 620+)
• Funding fee: 1.25–3.3% of loan (can be financed); waived for veterans with service-connected disability
• No loan limit for eligible borrowers with full entitlement

4. USDA loans

USDA loans are guaranteed by the U.S. Department of Agriculture for homes in eligible rural and suburban areas. Despite the "rural" label, many suburban communities qualify. The USDA eligibility map at eligibility.sc.egov.usda.gov lets you check any address.

Key features:

• 0% down payment
• Income limits apply — generally up to 115% of area median income
• Upfront guarantee fee: 1% of loan; annual fee: 0.35% (much lower than FHA MIP)
• Minimum credit score: typically 640+ with most lenders
• Property must be in an eligible area and meet condition standards

USDA loans are an underused option for buyers in qualifying areas who want 0% down without VA eligibility.

5. Jumbo loans

Jumbo loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac ($766,550 in most areas for 2024). Because they can't be sold to the GSEs, they stay on the lender's books — which means lenders carry the full risk and set their own guidelines.

Key characteristics:

• Stricter qualification: typically 700+ credit score, often 720–740+
• Higher down payment: usually 10–20% minimum
• Lower DTI requirements: often 43% max, sometimes lower
• Cash reserves: lenders often require 6–12+ months of mortgage payments in the bank
• Rates: can be slightly above or below conforming rates depending on market conditions

6. Fixed-rate vs. ARM

Regardless of loan type, you'll also choose between a fixed rate and an adjustable-rate mortgage (ARM).

A fixed-rate mortgage locks your rate for the entire loan term — your principal and interest payment never changes. The 30-year fixed is the most common mortgage in the U.S.

An ARM starts with a fixed rate for an initial period (typically 5, 7 or 10 years), then adjusts annually based on a market index. ARMs are named for their structure — a 7/1 ARM is fixed for 7 years, then adjusts every 1 year.

ARMs make sense if you're confident you'll sell or refinance before the fixed period ends, and you want the benefit of the lower initial rate. They carry real risk if rates spike during the adjustment period and you're still in the home.

7. Which loan is right for you?