Understanding the Common Types of Mortgage Loans

For most people, buying a home is the largest financial transaction of their lifetime. But navigating the various mortgage options can feel overwhelming. This simple guide will help you understand the most common types of mortgage loans available in 2025.

Conventional Loans: The Standard Option

Conventional loans are the most common type of mortgage and aren't backed by the federal government. These loans follow guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that purchase mortgages from lenders.

Key features:

• Typically require a credit score of 620 or higher
• Down payments as low as 3%, though 20% down helps you avoid private mortgage insurance (PMI)
• Can be used for primary residences, second homes, or investment properties
• Come in conforming versions (within loan limits) and non-conforming or "jumbo" versions (exceeding limits)

For 2025, the conforming loan limit in most areas is $806,500 for a single-family home, while high-cost areas have limits up to $1,209,750.¹

Jumbo Loans: For Higher-Value Properties

When you need to finance more than the conforming loan limits allow, jumbo loans come into play.

Key features:

• Finance amounts above the conforming loan limits
• Usually require larger down payments (often 10-20%)
• Typically need higher credit scores (often 700+)
• May have higher interest rates than conforming loans
• More stringent approval requirements including cash reserves

Jumbo loans are common in high-cost housing markets where home prices frequently exceed conforming loan limits.⁵

FHA Loans: Lower Barriers to Entry

Federal Housing Administration (FHA) loans are government-backed mortgages designed to help borrowers with lower credit scores or smaller down payments become homeowners.

Key features:

• Allow credit scores as low as 580 with a 3.5% down payment
• Some lenders may approve scores as low as 500 with 10% down
• Require mortgage insurance premiums (MIP) – both upfront and annual
• Often more flexible with debt-to-income ratios than conventional loans

FHA loans are particularly popular among first-time homebuyers who may not have established extensive credit histories or significant savings for a down payment.²

VA Loans: Benefits for Service Members

The Department of Veterans Affairs (VA) guarantees loans for eligible veterans, active-duty service members, and some surviving spouses.

Key features:

• No down payment required in most cases
• No mortgage insurance
• Competitive interest rates
• More flexible credit requirements compared to conventional loans
• Funding fee required (can be rolled into the loan), though some veterans may be exempt

VA loans represent a significant benefit for those who have served our country, making homeownership more accessible and affordable.³

USDA Loans: Rural and Suburban Options

The U.S. Department of Agriculture (USDA) offers loans to encourage development in rural and some suburban areas.

Key features:

• No down payment required
• Below-market interest rates
• Reduced mortgage insurance costs
• Property must be located in an eligible rural area
• Income restrictions apply (must not exceed 115% of the median income for the area)

If you're looking to buy in a less densely populated area, a USDA loan can be an excellent option for qualified buyers.⁴

Fixed-Rate vs. Adjustable-Rate: The Time Factor

Regardless of which loan type you choose, you'll need to decide between a fixed or adjustable interest rate:

Fixed-rate mortgages:

• Interest rate remains the same for the entire loan term
• Predictable monthly payments
• Options typically include 15, 20, and 30-year terms
• Protection from rising interest rates

Adjustable-rate mortgages (ARMs):

• Start with a lower fixed rate for an introductory period (commonly 5, 7, or 10 years)
• Rate adjusts periodically based on market indexes after the introductory period
• Monthly payments can increase or decrease over time
• Often expressed as 5/1, 7/1, 10/1 (first number indicates years of fixed rate, second number indicates how often the rate adjusts afterward)

ARMs may benefit homeowners who plan to move or refinance before the initial fixed period ends.⁶

Choosing the Right Mortgage

When selecting a mortgage, consider:

• Your credit score and financial situation
• How long you plan to stay in the home
• The size of down payment you can afford
• Current and projected interest rates
• Whether you qualify for special programs

Remember that the right mortgage varies based on individual circumstances. Working with a knowledgeable loan officer who can explain all your options is crucial to making an informed decision.

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_{This content is for informational and educational purposes only and should not be considered financial or legal advice. Always consult with a licensed mortgage professional or financial advisor before making major financial decisions.}

_{Sources: ¹ Federal Housing Finance Agency. (2025). "Conforming Loan Limit Values." ² U.S. Department of Housing and Urban Development. (2025). "Single Family Housing Policy Handbook 4000.1." ³ U.S. Department of Veterans Affairs. (2025). "VA Home Loan Guaranty Buyer's Guide." ⁴ U.S. Department of Agriculture. (2025). "Single Family Housing Guaranteed Loan Program." ⁵ Consumer Financial Protection Bureau. (2024). "Understand the different kinds of loans available." ⁶ Bankrate. (2025). "Mortgage types and how they work."}

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