What Type of Mortgage Loan Is Best?

Types of Mortgage Loans

There are three main types of mortgages. Each one is structured a little differently and has unique pros and cons to consider. Just as you house hunt to find the best property, it's wise to compare various home loans. The mortgage you choose can affect everything from your interest rate to your monthly payment.

1. Conventional Loan

A conventional loan is a type of mortgage that isn't insured by the federal government. It's also the most popular kind of home loan. Two-thirds of people who purchased a home in 2023 did so with a conventional mortgage, according to the National Association of Realtors (NAR).

These loans are originated and serviced by private mortgage lenders. Financial institutions like banks and credit unions offer conventional loans. You can also find them through online mortgage lenders. Conventional mortgage loans can be conforming or non-conforming.

Conforming vs. Non-Conforming Loans

A conforming loan is a conventional mortgage that meets certain standards established by Fannie Mae and Freddie Mac, the government-sponsored entities that guarantee most mortgages in the U.S. These mortgages have loan limits that are determined by average home prices in various parts of the country. In 2024, the conforming loan limit for a single-family home is $766,550, but it could be higher if you live in a more expensive city.

To qualify for a conforming loan, you'll likely need:

• A minimum FICO^® Score^☉ of 620 to 660
• A down payment of at least 3%
• A maximum debt-to-income ratio (DTI) of 45% to 50%. DTI is the percentage of your gross monthly income that goes toward debt payments.

Non-conforming loans don't necessarily meet these requirements and are not purchased or owned by Freddie Mac or Fannie Mae. Interest rates also tend to be higher on non-conforming loans.

Who conventional loans are best for: If you've got strong credit, a low DTI, and a down payment of at least 3%, a conventional loan could be a great fit. You can expect competitive interest rates, but keep in mind that the lender will probably take a deep dive into your financial health. Prepare to substantiate your income, employment, assets, debts and more.

2. Government-Insured Loan

These mortgages tend to have looser credit score and down payment requirements than other types of mortgages. That's because government-backed loans, which are offered by private lenders, are insured by one of the following agencies:

• The Federal Housing Administration (FHA)
• The U.S. Department of Agriculture (USDA)
• The Department of Veterans Affairs (VA)

Types of Government-Insured Mortgages

The three government agencies that insure mortgages are geared to specific buyers and come with their own requirements and benefits.

Government-backed mortgages offer some key benefits—like the ability to get into a home if you don't qualify for a conventional mortgage. But there are some potential downsides to consider.

Who government-insured loans are best for: This type of home loan can be a worthwhile option if your credit score or down payment are making it hard to qualify for a conventional loan. Just be prepared for the lender to closely review your finances—and possibly require mortgage insurance. With an FHA loan, this insurance could last the entire loan term. You'll also need to meet the eligibility requirements for whichever government-backed loan you're applying for.

3. Jumbo Loan

A jumbo loan is a non-conforming mortgage. As the name implies, loan amounts exceed the purchase requirements set out by Freddie Mac and Fannie Mae. But lenders may be more cautious when approving these loans since they're exposed to more risk. To qualify for a jumbo loan, you'll likely need:

• A minimum credit score of 700 to 720
• A down payment of at least 10% (in some cases, it could be as high as 30%)
• A maximum DTI of 36%

Who jumbo loans are best for: These types of mortgages might be a good match for borrowers with strong credit, a sizable down payment and low debt. Jumbo loans offer higher borrowing limits, so you'll want to be sure you can handle the financial responsibility. Having said that, this type of home loan could allow you to buy the house of your dreams.

Other Types of Mortgages

If the above loans don't fit your needs, you can look into additional types of mortgages.

• Interest-only loans: For a certain number of years, your payments will only go toward your loan interest—not the principal amount borrowed. When the interest-only period ends, your payment will go up significantly and cover interest and your principal. Because of their structure, these loans can cost more in interest over the life of the loan than other types of mortgages.
• Piggyback loans: This approach allows you to buy a house using two mortgages at the same time. You'll make a 10% down payment, then take out a mortgage for 80% of the home's value. From there, you'll likely use a home equity loan or line of credit to finance the remaining 10%. This strategy can help you avoid making a 20% down payment and paying for mortgage insurance.
• Construction-to-permanent loans: If you're building a new home, a construction-to-permanent loan can help you finance the cost of buying the land and building the house. However, they typically have stricter eligibility requirements and higher costs.
• Professional loans: These mortgages are reserved for certain high-earning professionals who are early in their career, like doctors and attorneys. They typically offer more flexibility around income and student loan debt.
• Balloon loans: With this type of home loan, you'll have a lower monthly payment for a certain amount of time, then one large payment when the term ends. Just bear in mind that the final payment could be tens of thousands of dollars—so you'll need to plan accordingly.

Fixed-Rate vs. Variable-Rate Mortgage: Which Is Best?

With a fixed-rate mortgage, you'll have the same interest rate for the life of the loan. With an adjustable-rate mortgage (ARM), you'll start with an initial fixed-rate period, but your rate can fluctuate after that. They each have their pros and cons.

A fixed-rate loan can be a good option if you secure a low rate and plan on staying in your home for a long stretch. Your overall costs will probably be lower. But a variable-rate mortgage may be a better option if you lock in a low rate and plan to move before it changes. An ARM might also get you a lower introductory rate during a period when rates are generally high.

What Else to Consider

Your mortgage isn't the only thing to think about when house hunting. The following factors can also increase the cost of homeownership:

• Your loan term (a longer term can give you a lower monthly payment, but you could pay substantially more over time)
• Closing costs
• Homeowners insurance
• Property taxes
• Mortgage insurance
• Homeowners association (HOA) fees, if applicable

The Bottom Line

There are several types of mortgages for homebuyers to consider. In the end, you want to meet the eligibility criteria and have a reasonable monthly payment. The best home loan for you will depend largely on your down payment, debt-to-income ratio and credit score. The stronger your score, the more likely you are to get approved for a mortgage—and at a competitive interest rate. You can check your credit report and FICO^® Score for free with Experian.