Different Types of Loans Available

Securing the right mortgage is a crucial step in the home buying process. Understanding the different types of loans available can empower you to make informed decisions that align with your financial situation and homeownership goals. Generally, mortgage loans fall into three main categories: conventional loans, government-backed loans, and special programs. Let’s explore each of these in detail.

Conventional Loans

Conventional loans are mortgages offered by private lenders, such as banks, credit unions, and mortgage companies, without government insurance or guarantee. These loans adhere to the guidelines set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.

Key Characteristics of Conventional Loans:

• Credit Score Requirements: Typically require a higher credit score compared to government-backed loans. Lenders want assurance that you have a history of responsible credit management.  
• Down Payment: Often require a down payment, which can range from as low as 3% to 20% or more, depending on the loan type and lender. A larger down payment can sometimes lead to better interest rates and may help you avoid private mortgage insurance (PMI).
• Private Mortgage Insurance (PMI): If your down payment is less than 20% of the home’s purchase price, lenders usually require you to pay PMI. This insurance protects the lender if you default on the loan. Once you reach a certain equity in your home (typically 20%), you may be able to have PMI removed.  
• Interest Rates: Interest rates on conventional loans are influenced by market conditions, your creditworthiness, and the size of your down payment.
• Loan Terms: Available in various terms, with the most common being 30-year and 15-year fixed-rate mortgages. Adjustable-rate mortgages (ARMs) are also available.

Types of Conventional Loans:

• Fixed-Rate Mortgages: The interest rate remains the same for the entire loan term, providing predictable monthly payments. This is a popular choice for buyers who value stability. For example, if you secure a 30-year fixed-rate mortgage at 6.5%, your principal and interest payment will remain consistent for the next three decades (though property taxes and insurance can fluctuate).
• Adjustable-Rate Mortgages (ARMs): The interest rate is fixed for an initial period (e.g., 5, 7, or 10 years) and then adjusts periodically based on a market index. ARMs can offer lower initial interest rates compared to fixed-rate mortgages, but your payments can increase significantly after the fixed period ends. For instance, a “5/1 ARM” has a fixed rate for the first five years, after which the rate can adjust annually.
• Conforming Loans: These loans meet the size and underwriting guidelines set by Fannie Mae and Freddie Mac. There are limits to the size of conforming loans, which are typically adjusted annually. For 2024, the baseline conforming loan limit for single-family homes in most of the U.S. was $766,550.
• Non-Conforming (Jumbo) Loans: These loans exceed the conforming loan limits. They are typically used for higher-priced properties and may have stricter qualification requirements.

Government-Backed Loans

These loans are insured or guaranteed by the federal government, making them less risky for lenders and often more accessible to a wider range of borrowers, especially first-time homebuyers or those with lower down payments or credit scores. The primary types of government-backed loans are FHA, VA, and USDA loans.

• Federal Housing Administration (FHA) Loans: Insured by the FHA, these loans are popular among first-time homebuyers due to their lower down payment requirements (as low as 3.5%) and more flexible credit score requirements. However, FHA loans typically require mortgage insurance premiums (MIP) for the life of the loan in most cases.
  • Key Features: Lower credit score requirements, low down payment options, MIP (both upfront and annual premiums).
  • Example: A first-time buyer with a credit score in the low 600s might qualify for an FHA loan with a 3.5% down payment.
• Department of Veterans Affairs (VA) Loans: Guaranteed by the VA, these loans are available to eligible active-duty military personnel, veterans, and surviving spouses. They often come with significant benefits, including no down payment requirement and no private mortgage insurance.
  • Key Features: No down payment for eligible borrowers, no PMI, often have competitive interest rates. Borrowers typically pay a one-time funding fee.
  • Example: A veteran who meets the service requirements may be able to purchase a home with no money down using a VA loan.
• U.S. Department of Agriculture (USDA) Loans: These loans are designed to help low- and moderate-income homebuyers purchase homes in eligible rural areas. USDA loans often have no down payment requirement.
  • Key Features: No down payment for eligible rural properties, income and property eligibility requirements.
  • Example: A family looking to buy a home in a designated rural area might qualify for a USDA loan with no down payment.

Special Programs

In addition to conventional and government-backed loans, various special programs exist to assist specific groups of homebuyers or to promote homeownership in certain areas.

• State and Local Housing Finance Agency (HFA) Programs: Many states and local governments offer programs to help first-time homebuyers and low-to-moderate-income individuals purchase homes. These programs may include down payment and closing cost assistance, as well as lower interest rates.
  • Example: Your state’s housing finance agency might offer a grant or low-interest loan to help with your down payment if you meet their eligibility criteria.
• Native American Direct Loan (NADL) Program: Offered by the VA, this program helps eligible Native American veterans finance the purchase, construction, or improvement of homes on Federal Trust Land.  
• Energy-Efficient Mortgages (EEMs): These FHA-insured or VA-guaranteed loans allow borrowers to finance energy-efficient improvements along with the purchase or refinancing of a home.
  • Example: You could use an EEM to finance the installation of solar panels or energy-efficient windows when you buy your new home.
• Good Neighbor Next Door Program: Offered by the Department of Housing and Urban Development (HUD), this program provides a discount on the list price of homes in revitalization areas to law enforcement officers, teachers, firefighters, and emergency medical technicians.

Understanding these different types of loans is the first step towards finding the mortgage that best suits your individual needs and circumstances. It’s always a good idea to speak with a qualified mortgage banker / lender to discuss your options and get pre-approved for a loan. We work with some of the best professionals in the market. Reach out to us on our form below to see if we can help you into your next new home.