Mortgage Types Explained: How to Choose the Right Home Loan
Major Mortgage Types at a Glance
| Loan Type | Min Down Payment | Min Credit Score | PMI / Mortgage Insurance | Loan Limits (2024) |
|---|---|---|---|---|
| Conventional | 3% | 620 | Required if <20% down; cancellable at 80% LTV | $766,550 (most areas) |
| FHA | 3.5% | 580 (500 with 10% down) | Upfront MIP (1.75%) + annual MIP (0.55%); lifetime if <10% down | $498,257–$1,149,825 |
| VA | 0% | No official min (typically 620+) | No PMI; one-time funding fee (1.25–3.3%) | No limit for eligible veterans |
| USDA | 0% | 640 | Upfront fee (1%) + annual fee (0.35%) | No set limit; based on income |
| Jumbo | 10–20% | 700+ | Varies by lender | Above conforming limits |
Conventional Loans
Conventional loans are the most common mortgage type, accounting for roughly 80% of all home loans. They’re backed by Fannie Mae and Freddie Mac (not the government directly) and come in two flavors: conforming (within loan limits) and non-conforming (jumbo).
Conventional loans offer the best rates for borrowers with strong credit (740+) and 20% down. With less than 20% down, you’ll pay PMI — but unlike FHA, conventional PMI automatically cancels when you reach 80% loan-to-value. This makes conventional loans cheaper long-term than FHA for most borrowers who start with less than 20% down.
FHA Loans
FHA loans are insured by the Federal Housing Administration and designed for borrowers with lower credit scores or smaller down payments. The 3.5% down payment with 580+ credit makes homeownership accessible, but FHA loans come with significant mortgage insurance costs.
The upfront mortgage insurance premium (MIP) of 1.75% is rolled into the loan, and annual MIP of 0.55% lasts the life of the loan if you put less than 10% down. For a $300,000 loan, that’s $5,250 upfront plus $1,650/year — costs that add up significantly over time. Many buyers start with FHA and refinance to conventional once they hit 80% LTV and improved credit.
VA Loans
VA loans are the best mortgage product available — period. Backed by the Department of Veterans Affairs, they offer zero down payment, no PMI, competitive rates, and no loan limits for eligible borrowers. The only cost is a one-time funding fee (1.25–3.3% depending on service and down payment), which can be rolled into the loan.
Eligibility extends to active-duty service members, veterans, National Guard and Reserve members, and some surviving spouses. If you’re eligible, a VA loan should be your default choice unless you’re putting 20%+ down (where conventional might edge it out on total cost).
USDA Loans
USDA loans offer zero down payment for properties in eligible rural and suburban areas. Income limits apply — generally 115% of the area median income. The upfront guarantee fee (1%) and annual fee (0.35%) are lower than FHA’s insurance costs, making USDA an excellent option for eligible buyers.
The “rural” designation is broader than most people think — many suburban areas qualify. Check the USDA eligibility map for your area.
Fixed-Rate vs Adjustable-Rate
Beyond the loan type, you’ll choose between a fixed-rate or adjustable-rate mortgage. Fixed-rate locks your interest rate for the entire loan term (15 or 30 years). Adjustable-rate (ARM) offers a lower initial rate for a set period (5, 7, or 10 years), then adjusts annually. For most buyers, a 30-year fixed rate provides the best combination of payment predictability and flexibility.
Choosing the Right Mortgage Type
| Your Situation | Best Mortgage Type | Why |
|---|---|---|
| 740+ credit, 20% down | Conventional 30-year fixed | Best rates, no PMI |
| Good credit, 5–19% down | Conventional (PMI cancels at 80% LTV) | Cheaper long-term than FHA |
| 580–660 credit, low savings | FHA | Lower credit requirements, 3.5% down |
| Military service | VA | Zero down, no PMI, best overall terms |
| Rural/suburban, moderate income | USDA | Zero down, low insurance fees |
| High-cost area, large loan | Jumbo | Only option above conforming limits |
| Selling/moving in 5–7 years | 5/1 or 7/1 ARM | Lower initial rate saves money if you sell before adjustment |
Key Takeaways
- VA loans are the best deal available — zero down, no PMI, competitive rates. Use them if eligible.
- Conventional loans are cheapest long-term for 680+ credit borrowers, even with less than 20% down (PMI cancels).
- FHA is best for 580–660 credit scores, but plan to refinance to conventional once your credit and equity improve.
- USDA offers zero down in eligible areas with lower insurance costs than FHA.
- Compare total lifetime cost across loan types, not just monthly payments or down payment requirements.
Frequently Asked Questions
What’s the difference between pre-qualification and pre-approval?
Pre-qualification is an informal estimate based on self-reported financial info — it carries little weight with sellers. Pre-approval involves a full credit check, income verification, and asset review by the lender, resulting in a conditional commitment to lend. Always get pre-approved before making offers.
Can I switch mortgage types after applying?
Yes, before closing you can usually switch loan types with the same lender or apply with a different lender. However, switching may restart the underwriting process and delay closing. The best approach is to compare loan types thoroughly before applying.
Is a 15-year or 30-year mortgage better?
A 15-year mortgage has lower rates and saves massive interest, but monthly payments are roughly 40–50% higher. A 30-year gives you lower required payments and more cash flow flexibility. The optimal strategy for many borrowers: take a 30-year fixed, but make extra principal payments as if it were a 15-year. This gives you the safety of lower required payments with the ability to pay it off faster.
What is PMI and how do I get rid of it?
Private Mortgage Insurance protects the lender (not you) if you default. On conventional loans, PMI automatically cancels when you reach 80% LTV through payments, or you can request cancellation at 80%. You can also reach 80% faster through home value appreciation — get a new appraisal to prove it. FHA mortgage insurance on loans originated after June 2013 with <10% down never cancels; you must refinance to conventional to remove it.
Should I pay points to lower my rate?
Each discount point (1% of the loan amount) typically lowers your rate by 0.25%. On a $300,000 loan, one point costs $3,000 and saves roughly $50/month. Breakeven is about 5 years ($3,000 ÷ $50/month). If you’ll stay longer than 5 years, points can save money. If you might sell or refinance sooner, skip them.