Types of home loans in 2024

Knowing what mortgages are available to you, before you apply, may be the key to achieving homeownership.

You could benefit from unique loan benefits if you have a basic understanding of the types of mortgages. You might be able to lower your rate, get some breathing space on your monthly payments or find a new home.

Read more about: How to obtain a mortgage by 2024

This is the most popular type of mortgage. There are also two subsets, conforming and nonconforming loans.

Conforming Loan

A conforming conventional mortgage is not backed up by any government agency. Instead, the loan is built to the specifications set forth by Fannie Mae and Freddie Mac to allow lenders to sell the loan to them in the future. Fannie Mae and Freddie Mac are private companies that have been authorized by the government, to invest money in the mortgage system.

This mortgage requires a good score of credit, no lower than 620. You must also have enough cash to cover a minimum 3% downpayment and any closing costs.

Non-conforming loans

Non-conforming conventional loan types are also available. Non-conforming loans don’t meet requirements set by Fannie Mae and Freddie Mac. Instead, they’re usually loans the lender intends to keep — not sell to another servicer.

Due to this, lenders are given more latitude. Lenders may be able accept lower credit scores, down payments, or offer unique repayment terms. They may also be able to loan out larger amounts than what is allowed by the Federal Housing Finance Agency. FHA, VA and USDA loans are all examples of nonconforming loans.

Read more about: Best FHA lenders

Jumbo mortgages are required for higher-priced houses. In most parts of the United States, the minimum amount for a Jumbo Loan in 2024 is $766.550. In Alaska and Guam, Hawaii and the US Virgin Islands minimum home value is $1.149.825.

Jumbo loans are typically best suited for highly-qualified mortgage applicants. Many lenders require a minimum 10% down payment and some prefer 20%. Credit scores near 700 or even higher may be required.

Federal Housing Administration loans are best suited to low- and moderate-income borrowers. FHA loans require lower credit scores and lower down payments. This leeway may be the only option for some Americans to put their name on property. While historically low delinquency, FHA loans had a recent late-payment rate that was three times higher than conventional loans.

If you’re on the financial edge and are considering buying a home, it may be a good plan to improve your credit score.

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VA loans are valuable benefits for servicemen, veterans, and spouses who qualify. VA loans are usually available with no down payment. This removes a huge barrier for millions of home buyers.

With the lowest supply of homes in years, you could be competing with cash rich conventional-loan purchasers who are wooing sellers with larger earnest deposits and a desire to waive seller-paid closing fees.

USDA loans, offered by the US Department of Agriculture are especially suitable for low-income rural and agricultural borrowers.

Yes, this is another zero-down-payment option, but to qualify, your household can’t earn more than the family-income limit where you’re buying — and the property needs to be in an eligible area.

Read more about: First-time home buyer in 2024 — What you need to know

Fixed-rate loans have the same rate of interest for the entire loan term. This means your monthly payment will stay the same, too (unless your costs of homeowners insurance or property taxes — also called escrow — go up).

With a fixed-rate mortgage, you’ll likely have to choose between 15-year and 30-year terms. The 30-year term is the most common. However, 15-year terms can save you a lot of money on interest but have higher monthly payments. Mortgage terms can be 10, 20, or even 25 years depending on which lender you choose. The FHA even offers a 40 year mortgage term to help homeowners struggling to pay their mortgage.

Most borrowers first think about fixed-rate loans, where the interest rate is fixed and does not change. It’s worth considering an adjustable-rate loan, especially with higher interest rates and rising home prices.

With an ARM, your annual percentage rate is fixed for a number of years — say the first five, seven or even 10 years — and then the interest you pay will adjust every six months or annually. ARMs come in a variety of forms.

Read more about: Fixed-rate vs. variable-rate mortgage

All of the above mortgages are first-lien mortgages. This means that if you default on your payments, then the lender has a claim on your home. They can sell it and use the proceeds of the sale to pay the debt they still owe you.

You can also get second mortgages in addition to your first mortgage. These mortgages will not be repaid by the lender until your first lender is repaid (if you default). They are therefore a little riskier than first loans. This is why they usually come with higher rates and stricter requirements.

A home equity loan allows you to borrow money from the equity in your home. You can borrow up to 85%, less the balance of your first mortgage. Once you close the loan, you’ll receive the cash in a lump-sum.

You can use a home equity loan to pay for renovations or consolidate your debt. You will usually pay back the lender with a fixed interest rate and payment over 3-5 years. Some of these loans come with tax deductions, depending on the way you use the funds.

Home equity lines of credit — HELOCs — are a similar tool, only instead of a lump sum, you get a line of credit. This is similar to a credit card, as you can borrow money from the line of credit, pay it back and then use it again for a longer period.

Usually, you’ll only be required to pay interest for the first ten years. You’ll then make principal plus interest payments. These can fluctuate as HELOCs have variable interest rates that move up and down over time.

Read more about: HELOC vs. Home Equity Loan: Tapping equity when rates are high

Assumable mortgages are loans that can be assumed by another borrower while maintaining the same interest rate and terms. Assumable loans are VA, FHA, or USDA loans.

The lender must still approve a new borrower as they would anyone they loaned money to. You will need to fill out an application and submit financial documents. You will also need to verify your employment. Not all borrowers are approved.

Reverse mortgages can be a good option for seniors. For the government version — called the Home Equity Conversion Mortgage (or HECM) — you need to be at least 62 to get one of these. Some lenders offer proprietary reverse-mortgage programs that go as low as age 55.

Reverse mortgages allow you to receive money from your equity instead of paying the lender. You can choose a lump sum payment, a line of credit, or monthly payments — a popular choice for seniors on limited income. Sometimes you can choose a mix of these payment options.

These loans do not require monthly payments. You will either repay the lender when you sell the house or move permanently away (to an assisted living facility, for instance), your heirs or estate will pay the amount borrowed.

Mortgages that are qualified must meet the requirements set forth by the Consumer Financial Protection Bureau. To qualify, borrowers must have a certain ratio of debt to income. They also cannot be charged excessive fees or offered interest-only mortgages or balloon payments.

Non-QM loan regulations are less strict, which gives lenders more flexibility. Lenders will accept lower credit ratings or higher DTIs. They may also evaluate your income in a different manner (perhaps by using bank statements rather than W-2s and paystubs).

These loans can be a good option for freelancers or small business owners. They are also a good option for workers with incomes other than the 9-to-5. These types of loans can also be beneficial to borrowers with low credit scores and high debt. You’ll have to shop around to find a lender who offers these programs if you want to use them for your home purchase, or if you want to refinance.

ITINs, or Individual Tax ID Numbers, are an alternative to Social Security Numbers for those who do not qualify for one. ITINs are used by Americans to file their annual tax returns at the Internal Revenue Service.

Some lenders have loan programs that are only for these taxpayers. They allow them to qualify using their ITIN as opposed to an SSN. This includes foreign nationals and non-U.S. Citizens. Not all lenders provide these types of mortgages.

You may want to consider a construction loan if you are looking to build your own home rather than buy an existing one. These are mortgages you can use to foot the bill for the construction of a home — the materials, labor, permits, etc. Once the home is completed, you will pay back a traditional mortgage over time. These require two closings, one for the construction loan, and another for the permanent mortgage.

Construction loans are usually paid in several lump-sum payments as the construction progresses. An inspector may be involved in approving each milestone, which triggers the release of funds.

Learn more: Buying a home under construction

Land loans are available to those who wish to purchase land. If you are looking for land to build your home or business but aren’t ready to start building, this is the loan for you. You’d use a loan for construction in this case.

When you get a land loan, you’ll need to tell the lender how you plan to use the land, and they’ll usually require certain checks of the property, too — to verify its zoning limitations, boundaries, utility access, and more. Not all lenders offer land loan options, so you’ll need to shop around.

Renovation loans can be used to finance updates to a home you already own, or if you are buying a fixer upper, a home you are about to buy. Your renovation loan will include both the price of the home and the estimated costs for renovation. In this category, you can choose from FHA 203k loans, VA renovations loans, and Homestyle Renovation loans by Fannie Mae.

If you are renovating an existing home, you may want to consider a HELOC or cash-out refinance. There are energy-efficient mortgages available that can help cover the cost of green upgrades, such as adding solar panels or upgrading insulation.

A chattel loan is a type of mortgage used for buying manufactured housing — or some other piece of personal property that’s physically movable (like farm machinery, for instance). The home or property is used as collateral for these loans and can be taken if you don’t make payments.

Chattel loans are not like traditional mortgages. They don’t allow you to buy the land that your property is built on. Instead, it only covers the home you are financing or any other movable assets.

Bridge loans are designed to bridge a gap between two large loans. You can use a bridge loan to buy a house and sell it at the same time. These loans usually last between six months and a year.

A bridge loan that is large enough to cover a downpayment on a new home is a common way to use them. You’d get a traditional loan on the new house, and then, when you sell your old home, use the proceeds to pay back the bridge loan as well as your old mortgage, leaving you only with one mortgage.

A piggyback loan is a second mortgage that you can use to pay a larger deposit. Most borrowers choose the 80-10-10 method. This means that they take out an 80-10-10 mortgage, a piggyback loan for another 10 percent, and a 10% deposit from their own savings. This gives them a total of 20% down payment, and they can avoid paying private mortgage insurance (PMI). You can also get a better interest rate and mortgage terms.

Balloon mortgages have a low or no monthly payment period, but the full balance is due at the end of their term. These are usually shorter term loans lasting only a couple of years. They may require you to pay only the interest until your balloon payment is due.

Some versions of this type of loan may have a fixed rate and payment, but once the period has expired, your remaining balance will be re-amortized at a new rate based on current market conditions, and you’ll need to make new payments.

Learn more: Five strategies to lower your mortgage rates

Some lenders offer mortgage programs to borrowers who are in certain career fields. One common example is a medical professional loan that is targeted at doctors and other professionals in the medical field.

These loans are similar to traditional mortgages, but they may have fewer requirements for qualification. They may not require a down payment, or allow a higher debt-to income ratio. Due to recent medical school expenses, new doctors are more likely to have high debt or little savings. (Although the doctors have a high earning potential in the future and are unlikely to default their loans.

If you are thinking about buying a property to rent or fix-and-flip, you may want to consider a mortgage for investment properties. These are for properties where you plan to earn income. They also allow alternative ways of qualifying than other loans. You could, for instance, use the expected future rent on the property as a qualification factor.

Investment property mortgages typically require higher down payments and more cash reserves than other loans. You’ll need to have six months’ worth of mortgage payments in your savings to qualify.

Mortgages with interest-only payments delay the payment of principal for several years and temporarily lower your payment. After the introductory phase, your payment will be higher and split between interest and principal, just like a typical mortgage.

Tip: Interest-only mortgages are risky, particularly if the value your home decreases. You may have difficulty refinancing your mortgage, selling your home, or affording the higher monthly payment.

Mortgages are available in a variety of types, including conventional, FHA, VA and adjustable rate mortgages.

Interest-only mortgages may be the most risky types of home loans, because you do not pay down your principal for the first few years. You are therefore not building equity. You could also face financial difficulties when your regular mortgage payments kick-in and you are required to add the principal to your monthly payments.

FHA, VA and USDA loans have typically the lowest mortgage rates. You could get a lower rate with an adjustable-rate loan (ARM) for the first few months. You should be aware that your rate may increase after the intro-rate period with an ARM.

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