Ask the Expert: What Types of Mortgages Are Available?

If you’re looking to buy a home, it’s important to understand the different types of mortgages available. Here’s a quick overview of the four most common types: conventional, jumbo, government-backed, and adjustable rate mortgages (ARMs).

1. Conventional Mortgages

A conventional mortgage is the most common type of mortgage. It has a fixed interest rate that doesn’t change over the life of the loan, which typically ranges from 15 to 30 years. This type of mortgage is best suited for borrowers with good credit, low debt, and a down payment. While the down payment can sometimes be as low as 3 percent, a down payment of less than 20 percent usually requires private mortgage insurance (PMI).

Conventional loans typically conform to Federal Housing Finance Agency (FHFA) standards. These loans can be purchased by government-sponsored enterprises like Fannie Mae and Freddie Mac and are called conforming loans. As of 2024, conforming loans can’t exceed $766,550 in most areas or $1.1 million in high-cost areas.

2. Jumbo Loans

Jumbo loans are non-conforming loans because they exceed the FHFA’s standard loan limits. They are considered higher risk and often require higher credit scores, lower debt-to-income ratios, and more substantial assets. In high-cost real estate markets, jumbo loans are common for buyers with excellent credit and significant financial resources.

3. Government-Backed Loans

Government-backed loans are designed to make homeownership accessible to more people. These loans are issued by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA):

• FHA Loans: These loans are available to borrowers with a minimum credit score of 580 and a down payment as low as 3.5 percent. They are a popular option for first-time homebuyers or those with less-than-perfect credit.
• VA Loans: Exclusively available to veterans, active-duty service members, and their surviving spouses. VA loans typically require no down payment, mortgage insurance, or minimum credit score, making them an attractive option for eligible buyers.
• USDA Loans: These loans are designed for people buying in eligible rural areas. They offer competitive interest rates and may require no down payment, making them an excellent option for qualifying buyers looking for homes outside major urban centers.

4. Adjustable-Rate Mortgages (ARMs)

Adjustable-rate mortgages (ARMs) account for about 5 percent of new mortgages today. ARMs start with a low initial payment, but the interest rate can change over time, usually in relation to changes in overall interest rates. This type of mortgage can be a good choice for people who plan to sell their home within a few years or expect their income to increase in the near future.

Choosing the Right Mortgage

When selecting a mortgage, consider your financial situation, credit score, future plans, and the specific requirements of each loan type. Speak with a mortgage advisor to find the best option for your needs and goals.