Types of Conventional and Government-Backed Mortgages

Read Time: 7 minutes

There are many different types of mortgage loans. Though many people simply think of a mortgage as the loan used to buy a home, a mortgage is any type of loan secured by home equity.

There are many types of loans, each with different requirements to determine if you qualify or not. The loan you decide upon will greatly impact your payments for several years, so it’s in your best interests to do your homework and get help from your real estate agent and a mortgage professional before reaching a final decision.

Some require little or no down payments, and interest rates and the loan length will vary depending on the nature of the loan and what you can qualify for. A single type of mortgage loan may have multiple features or be useful for several different purposes.

Mortgage loans primarily fall into two categories. They are government-funded loans and conventional loans, which are loans not backed by the government.

Here’s a quick overview of the most common loans to help educate you on which is best for you. 

Government-Backed Loans

Federal Housing Administration (FHA) Loans

The U.S. Department of Housing and Urban Development (HUD) FHA offers Federal Housing Administration loans to help people with lower credit scores or limited down payment funds. 

The FHA insures them to lower the risk for lenders and make homeownership more accessible. FHA loans are a good option for first-time buyers because they offer flexible eligibility criteria and lower down payment requirements.

U.S. Department of Veterans Affairs (VA) Home Loans

The VA provides a purchase program for veterans, active-duty service members, and eligible surviving spouses. VA loans have competitive interest rates, no down payment requirements in most cases, and no PMI.

U.S. Department of Agriculture (USDA) Loans

The USDA offers loans to people living in rural areas. These loans provide affordable financing options with low interest rates and flexible credit requirements, helping people who may not qualify for traditional loans. 

HUD’s Good Neighbor Next Door Program

HUD’s Good Neighbor Next Door Program offers housing opportunities for teachers, law enforcement officers, firefighters, and EMTs. This program offers discounts of up to 50% on purchasing eligible HUD-owned properties in some revitalization areas.

The goal is to encourage professionals in these fields to live and work in underserved communities. 

Conventional Loans

Conventional loans have higher minimum credit score requirements and are harder to qualify for than government-backed mortgages. If you put down less than a 20% downpayment, you’ll typically pay private mortgage insurance (PMI) to protect the lender’s interests.

Rates vary among lenders, especially for shorter terms, so shopping for the best deal is essential in your buying process.

Conforming Loans

The most common type of conventional mortgage is a conforming loan. It adheres to Fannie Mae and Freddie Mac guidelines and has loan limits, which often change annually to adjust for increases in home values. For example, the 2024 conforming loan limit is $766,550 for a single-family home in most areas.

Some parts of the US with higher housing costs have higher limits. There are regions in 19 states and the District of Columbia with higher limits due to higher housing costs.

Borrowers usually must have a 620 minimum credit score for approval and provide substantial income and asset documentation. Lenders usually require at least a 3% down payment and PMI for a down payment of less than 20%.

Non-Conforming (Jumbo) Loans

A jumbo loan is for an amount higher than conforming loan limits by Fannie Mae and Freddie Mac in your area. You usually need a jumbo loan to buy a high-value property.

Jumbo loan interest rates are usually similar to conforming interest rates, but they’re more difficult to qualify for than other types of loans. You’ll need a higher credit score of 700 or above and a lower DTI to qualify. You’ll also need a large down payment, usually between 10-20% or more of the home’s value.

Other Types of Loans

You may get approved for an interest-only loan with terms that let you make payments for a fixed period before the principal must be paid off. These are popular options for home construction loans, HELOCs, jumbo loans, and ARMs.

They have higher rates than fully amortizing loans and higher payments when principal and interest payments kick in. HELOC and construction interest-only loans are often refinanced into a conventional mortgage.

Piggyback loans are second mortgages or liens that allow you to borrow against the equity you’ve built in your home over time. Similar to a first mortgage is also secured by your home. 

Both home equity loans and home equity lines of credit (HELOCs) are types of second mortgages. A home equity loan is a lump-sum amount repaid in fixed installments over a set term. A HELOC is a revolving credit line, much like a credit card.

You can use the funds, repay the amount, and reuse the funds for as long as the credit line is open. It is usually divided into a draw period, during which you can borrow money, followed by a repayment period.

A reverse mortgage is a home equity loan for people 62 and older. It is often used as a monthly 

stipend to supplement retirement income with monthly cash advances for a limited time or for a lifetime stipend.

Borrowers don’t need to repay funds borrowed for as long as they reside in the home, but the loan liability cannot exceed equity in the home. Costs are significantly higher than for other types of home equity loans, and draining equity could leave a borrower without financial reserves.

You can also refinance your existing loan and take out a new mortgage to pay off and replace an existing mortgage. Owners often do this to get more desirable loan terms than current mortgage offers, such as lower interest rates, lower monthly payments, shorter or longer payoff terms, or to replace an adjustable-rate loan with a fixed-rate loan or vice versa.

A cash-out refinance is similar. It is a single transaction to refinance your current mortgage and borrow against your available home equity. You can borrow money for any purpose, and loan terms can be fixed rate or adjustable.

If you want to buy a fixer-upper, a 203(k) loan lets you take out a single loan to cover the home purchase and needed improvements. All repairs funded by the loan must be completed within six months. You can also use proceeds above the purchase price for temporary housing while renovations are made. 

Individual owners/occupants and qualified nonprofit organizations can only use these loans. Also, you can’t buy a second or investment property with a 203 (k) loan.

What to Know About Interest Rates and Loan Lengths

Interest rates for loans can be fixed rate or adjustable based on parameters a lender uses to change the interest rate from time to time.

A fixed-rate mortgage is the more popular by a wide margin and offers consistency, so you’ll know exactly how much you must pay in principal and interest each month. Your total monthly payment can still change if your property taxes, homeowner’s insurance, or mortgage insurance goes up or down.

An adjustable-rate mortgage (ARM) can have payments that change but may be a good choice for buyers seeking a short-term advantage since they are cheaper at the beginning of issuance.

Most ARMs have two periods. Your interest rate is fixed and won’t change in the first period. Your rate can go up and down regularly based on market changes during the second period.

Because of this unpredictability, borrowers often refinance during the second period to prevent large payment increases when rates are rising.

Loans can be issued for almost any timeframe, but a 30-year fixed-rate loan is the most common. Lenders allow borrowers to use proceeds for a home purchase, mortgage refinance, cash-out refinance, home equity loan, jumbo mortgage, FHA, VA, and USDA loans, among others.

With a longer commitment, you’ll get lower monthly payments because the lender stands a great chance of getting paid more interest over the longer term. Translated, that means you’ll get a lower interest rate but still pay a lot more over the full term of the loan.

Another popular option is a 15- or 20-year fixed-rate loan. The same parameters generally apply, but with a shorter term, you’ll pay less interest over time and build equity in your home quicker.

It’s best for buyers refinancing after paying down the balance on their original mortgage and those seeking to pay off their mortgage relatively quickly.

ARMs also come with 15 to 30-year timeframes and may make the most sense in some home purchases when buyers want to minimize their short-term rates and payments. This is a good option for buyers who intend to sell in a 3-10 year window.

ARMs have various terms. For example, a 5/1 ARM means payments during the first 5 years of the loan will stay the same. After that, adjustments will take place one year at a time. Common fixed periods are 3, 5, 7, and 10 years; adjustable periods may occur every 1, 3, or 5 years.

ARMs are usually marketed to people with lower credit scores who tend to be riskier for the borrower.

Kirk Haverkamp

Kirk Haverkamp is an award-winning reporter and editor with more than 25 years of experience in journalism and public relations. He has contributed to Credit.com, Investopedia, and MetroMode online magazines, among other work. He has a B.A. in English from Hope College and a Master’s Degree in journalism from Michigan State University.

Unleash the Full Potential of Your VA Home Loan Benefits

Check Eligibility