13 Types of Mortgages to Choose From When Buying a Home

When purchasing a home, you must select which sort of mortgage is best for you. Your decision may be influenced by the amount of money you need to borrow and the strength of your finances.

If you don’t qualify for one sort of mortgage, you might be able to locate another, that is.

1. Conventional mortgage

A conforming mortgage is a sort of conventional mortgage that is not guaranteed by a government organization like the FHA. A conforming loan adheres to the Federal Housing Finance Agency’s borrowing limits (FHFA).

Every year, the FHFA sets the conforming loan limit, which in most parts of the US is $726,200 in 2023. In places with a higher cost of living, the maximum rises to $1,089,300.

To obtain a conforming loan, many lenders require a 620 credit score and a debt-to-income ratio of 36% to 50%. If your mortgage is backed by government-sponsored mortgage companies Fannie Mae and Freddie Mac, you’ll need at least 3% down, though individual lenders may ask more.

If you have less than 20% down on a conforming mortgage, you will be required to pay private mortgage insurance. PMI typically charges 0.2% to 2% of your mortgage balance. Once you have at least 20% equity in your house, you can cancel your PMI.

2. Large mortgage

Another sort of conventional loan is a jumbo mortgage, commonly known as a non-conforming mortgage. To borrow more than the FHFA borrowing limit, you’ll require a jumbo mortgage.

As previously stated, the limit in most regions of the United States in 2023 is $726,200, with a maximum of $1,089,300 in areas with a higher cost of living. A jumbo mortgage is one that exceeds certain boundaries.

Because lenders are taking a bigger risk by lending you more money, jumbo mortgage eligibility standards are a little higher than for conforming mortgages. Each lender has its own set of requirements for nonconforming mortgages, but you’ll almost certainly need a higher credit score, a lower debt-to-income ratio, and a larger down payment than you would for a conforming mortgage.

3. FHA home loan

FHA, VA, and USDA are the three forms of government-backed mortgages or home loans backed by federal agencies. The agency rewards the lender if you fail to make your mortgage payments. This reduces the risk for your lender, making the loans more accessible to you.

An FHA mortgage is a federally insured mortgage guaranteed by the Federal Housing Administration. If your credit score is 580 or higher, you can acquire an FHA mortgage with a 3.5% down payment, or a 10% down payment if your score is 500 to 579.