Key takeout
A traditional loan that is perfect for people with strong credit and stable income. FHA loans are ideal for first-time or low-credit buyers. VA and USDA loans will result in zero down payments for eligible buyers. Jumbo Loans are for high value homes with regard to conformance restrictions
In many cases, buying a home means taking away your mortgage, but not all mortgages are the same. Choosing the right loan is one of the biggest financial decisions you make. Whether you’re browsing homes for sale in Los Angeles, California or Chicago, Illinois, understanding the different types of home loans can help you find one that suits your budget and goals.
This Redfin article will explain the most common loan types, how they work and who qualify.
What is a mortgage?
A mortgage is a loan that buys a home from a bank, credit union, or lender. Instead of paying the full price upfront, you agree to borrow money and pay it back over time with interest. The house itself acts as a collateral. This means that if you do not make a payment, the lender has the right to seize and sell the property to restore balance.
Mortgage payments usually involve four main parts, often called PITI. Includes principals (loan amount), interest (loan expenses), taxes (property tax), and insurance (homeowner and mortgage insurance).
Mortgage Type:
1. Traditional loans
Best: Borrowers with credit and stable income.
Traditional mortgages are not supported by the government. Instead, they are provided by private lenders such as banks, credit unions, and mortgage companies.
Down payment: as low as 3% (but 20% avoids PMI). Credit score requirements: Usually 620 or higher. Loan restrictions: Set annually by the Federal Housing Financial Institution (FHFA).
Strong Points:
Flexible loan terms (usually 15 or 30 years). If you have strong credit, competitive interest rates. It’s down by 20% and you don’t need prepaid mortgage insurance.
Cons:
More stringent credit and income requirements. Private mortgage insurance (PMI) if it is less than 20%.
2. FHA loan
Best for: First-time home buyers or people with low credit scores.
FHA loans are guaranteed by the Federal Housing Administration, which reduces the risk to lenders and makes it easier for more buyers to qualify.
Down payment: Credit scores above 580 are low at 3.5%. Credit score requirements: Minimum of 500 (10% reduction). Mortgage insurance: Required for the life expectancy of your loan (except for refinancing).
Strong Points:
Reduce your credit score and income requirements. A small down payment compared to traditional loans.
Cons:
Mandatory Mortgage Insurance Premium (MIP). Loan restrictions vary depending on the location.
>>>Read: Can I get a mortgage without a credit history?
3. VA loan
Optimal: Active-duty veterans, veterans, eligible surviving spouses.
VA Loans are supported by the U.S. Department of Veterans Affairs and provide generous benefits.
Down payment: No need. Mortgage insurance: No need. Funding Fee: One-time fee (exemptions in certain cases).
Strong Points:
There are no down payments or PMIs. Competitive interest rates. Flexible credit requirements.
Cons:
Available only to eligible veterans and service members. Unless you are exempt, funding fees can increase your total costs.
4. USDA loan
Best: Eligible country or suburban buyers.
USDA loans are supported by the USDA Department to encourage homeownership in less populated areas.
Down payment: No need. Income Limitations: Local USDA income guidelines must be met. Location Limitations: The home must be in a qualified rural area.
Strong Points:
0% down payment. Low interest rates. Reduce mortgage insurance costs.
Cons:
It is restricted to specific geographical areas. Eligibility requirements for income.
5. Jumbo Loan
Best: Buyers who buy a valuable home.
Jumbo loans exceed the conforming loan limit set by FHFA. These loans are common in the expensive housing market.
Loan amount: Over $766,550 in most sectors (2024 limit, higher in certain markets). Credit score requirements: Usually 700+. Down payment: Usually 10-20% or more.
Strong Points:
Funding luxury or high-cost properties. Flexible terms available.
Cons:
More stricter credit and income verification. You need a higher interest rate and a larger down payment.
6. Other Professional Loans
Interest Only Loan: The borrower pays only interest on the set period before repaying the principal. Balloon Mortgage: A low initial payment with a large balance at the end. Construction Loans: Short-term funding for building a home is often converted into a permanent mortgage upon completion. >>>Read: How to get a Jumbo Construction Loan
Home loan rate structure
Adjustable Mortgage (ARM)
Best: Buyers planning to sell or refinance within a few years.
ARMs start with a fixed interest rate for the initial period (such as 5, 7, or 10 years) and adjust regularly based on the market. In many cases, the initial rate is lower than a fixed-rate mortgage, making monthly payments more affordable at first. However, once the adjustment period begins, the rate can rise or fall. This means that payments may change and forecasts may drop in the long term.
Fixed-rate mortgage
Optimal: Buyers who need stable and predictable payments.
Fixed-rate mortgages typically have the same interest rate for the entire loan term, for 15, 20, or 30 years. Payments are consistent month-to-month, making budgets easier and protecting borrowers from rising interest rates. The trade-off is that fixed-rate loans often start at a higher interest rate than weapons unless you refinance, and if interest rates drop, you will be less flexible.
How to choose the right mortgage
Choosing the best mortgage depends on your financial profile and goals. Consider:
Credit Score – Traditional loans reward higher scores, while FHA operates with lower scores. Your Savings – USDA and VA loans require little or no down payment, but traditional jumbos and jumbos often require more. How long will you stay at home – the weapons work well in the short term, but the fixed interest rates provide long-term stability. Debt-to-Income Ratio (DTI) – Lenders assess their ability to manage monthly payments.
Compare the types of loans side by side
Here’s a quick comparison of the most common mortgage options:
Loan type Min. Down Payment Credit Score Key Disadvantages Optimal Traditional 3% 620+ Buyer Solid Credit PMI, FHA 3.5% 580+ (500 w/10%) First-time or Low Credit Buyer Lifetime Mortgage Insurance va 0% Flexible Veteran & Service Member Funding Fees USDA Strictly Approved Fixed Rates Often Change 620+ Long-term Stability
Explained loan terms: 15 vs. 30 years
When choosing a mortgage, you also choose the length of the term. This term is the amount of time it takes to repay a loan, which has a major impact on your monthly payments, total interest costs, and how quickly you earn stocks.
15-year mortgage: You’ll pay more monthly, but you can pay off your loan faster and save a lot of interest. For example, you can pay thousands of total interest compared to a 30-year loan. Also, shorter conditions help you build home equity faster. This can be useful if you are planning to sell or refinance on the street. However, higher payments can put a strain on your budget. 30-year mortgage: This is the most common loan term for buyers as it reduces monthly payments over a longer period. The trade-off is that you pay more interest over the life of the loan. This option provides more flexibility to manage your budget and allows you to free up cash for other expenses and investments. 20 or 25-year loans: These terms serve as interim facilities that balance monthly payments that can be managed with less total interest than 30-year loans.
Important Points: Short-term conditions save money with interest and help you own your home faster, while longer conditions reduce monthly costs and improve affordability. The best choice depends on your income stability, financial goals, and the length of time you stay at home.
Refinance options
Homeowners can switch loan types to refinance or have better terms. An example is:
FHA → Traditional: Remove mortgage insurance. ARM → Fixed Interest Rate: Locking stable interest rates. Refinance cash-out: Take advantage of home equity.
>>>Read: Should I refinance my mortgage?
How to apply for a mortgage
Check your credit score and fix the issue. You will be approved in advance to know your budget. Submit an application with income, assets and liabilities. Underwriting Process – The lender validates the information. Evaluation and inspection to confirm the value of the home. Close the loan, sign the final paper loak and receive the keys to your home.
Frequently Asked Questions about Mortgages
1. Which type of mortgage is the easiest to get?
FHA loans are often considered the easiest due to their low credit and down payment requirements.
2. Which mortgage is best for first-time buyers?
FHA and USDA loans are popular with first-time buyers. VA loans are excellent for eligible veterans.
3. Which type of loan has the lowest fee?
VA loans usually have the most competitive rate, followed by traditional loans for borrowers with excellent credit.
4. Can I switch loan types later?
Yes, you can change from FHA to traditional or arm to fixed interest rates through refinance.
