Are There Different Types Of Mortgages?
There are many types of home loans. Each has different requirements, interest rate ranges and benefits. The two main categories of mortgages are conforming loans and non-conforming loans. Non-conforming loans include government-backed, jumbo and non-prime mortgages.
Here are some common mortgage types:
Conventional Conforming Loans
A conventional loan is a loan that’s not insured by the federal government. Most conventional loans are conforming loans. “Conventional” means a lender is issuing a loan without a government agency’s guarantee. “Conforming” means the mortgage meets the requirements set by Fannie Mae and Freddie Mac – two government-sponsored enterprises that buy loans to keep mortgage lenders liquid so they have enough capital to continue lending to borrowers.
Conventional loans are a popular choice among buyers. Depending on your finances, homeownership history, and credit score, you may be able to get a conventional loan with a 3% down payment, which can get you into a home sooner. But you should also factor in the monthly cost of private mortgage insurance because you put less than 20% down.
Non-Conforming Loans: Government-Insured Mortgages
Many lenders also offer government-backed mortgages. Government-backed home loans are especially attractive to first-time and low- to moderate-income borrowers and borrowers with smaller savings and credit issues.
FHA Loans
FHA loans are backed by the Federal Housing Administration. They’re popular because they have low down payment and credit score requirements. You can get an FHA loan with a 3.5% down payment and a 580 credit score.
The FHA promises to reimburse lenders when a borrower defaults on their loan, sharing the risk lenders assume when issuing a loan. The guarantee encourages lenders to make these loans available to borrowers with lower credit scores and smaller down payments.
VA Loans
VA loans are backed by the Department of Veterans Affairs. It’s a home buying benefit for qualified active-duty military members, reservists, National Guard members, veterans and their surviving spouses.
VA loans are a great option because, if you qualify, you can buy a home for 0% down, and you won’t pay mortgage insurance.
USDA Loans
USDA loans* are backed by the U.S. Department of Agriculture. The loan only applies to homes in USDA-approved rural and suburban areas. To qualify for a loan, a borrower’s household income can’t exceed 115% of an area’s median income.
You can buy a home for 0% down, and for some borrowers, the USDA’s required guarantee fee will cost less than the FHA mortgage insurance premium.
*Rocket Mortgage doesn’t offer USDA loans at this time.
Conventional Non-Conforming Loans: Jumbo Mortgages
Conforming mortgages are subject to lending limits. In 2024, the conforming loan limit in most of the U.S. is $766,550. In high-cost housing areas, the limit is as high as $1,149,825. If you want to buy a house that costs more than that and need financing, you’ll apply for a jumbo loan.
Because jumbo mortgages exceed conforming loan limits and aren’t backed by government agencies, they’re considered conventional non-conforming loans. A jumbo loan typically requires at least a 20% down payment and tons of paperwork for approval.
Rocket Mortgage offers the Jumbo Smart loan. You can borrow up to $3 million with a Jumbo Smart loan.
Mortgage Glossary
You may encounter some unfamiliar industry lingo as you shop for a home. Use our glossary to get comfortable with some common mortgage terms.
Amortization
A portion of each monthly mortgage payment goes toward paying interest and paying down a loan’s principal balance. Amortization is how those payments get divided over the life of the loan.
When you begin repaying your loan, a higher portion of your mortgage payment will go toward interest. Over time, more of your payment will go toward paying down your principal balance.
Down Payment
A down payment is the money you pay upfront to purchase a home. In most cases, you’ll put money down to get a mortgage.
The down payment amount you’ll need will vary based on the type of loan you’re getting. Generally, a larger down payment means better loan terms and a smaller monthly mortgage payment. If you put 20% down on a conventional loan, you’ll likely get a favorable interest rate and avoid paying PMI. If you make a 3% down payment – the minimum down payment for conventional loans – you’ll likely pay PMI, increasing your monthly mortgage payment.
Use a mortgage calculator to see how your down payment amount will affect your monthly payments.
Escrow
Part of owning a home is paying for property taxes and homeowners insurance, which lenders manage on a borrower’s behalf through an escrow account. The escrow account operates like a noninterest-bearing checking account and collects the money your lender uses to pay your taxes and insurance. The escrow payments are added to your monthly mortgage payment and then deposited into the escrow account by your lender.
Not all mortgages have an escrow account. If your loan doesn’t have one, you must pay your property taxes and homeowners insurance bills yourself. An escrow account is typically required if your down payment is less than 20%.
How much you have in your escrow account will depend on the annual cost of your insurance and property taxes. Because these expenses may change from year to year, your escrow payment can change, causing your monthly mortgage payment to increase or decrease.
Interest Rate
An interest rate is a percentage charged by a lender each month as a fee for borrowing money. Interest is based on macroeconomic factors, like the federal funds rate, and a borrower’s credit history and financial fitness, like their credit score, income and assets.
Mortgage Note
A mortgage note is a promissory note that details the repayment terms of a loan used to purchase a property. It’s like an IOU, and it details the repayment guidelines, including:
- Interest rate
- Interest rate type (adjustable or fixed)
- Total loan amount
- Loan term (length of time to pay back the loan)
Once the loan is repaid, the homeowner receives the promissory note.
Loan Servicer
A loan servicer sends monthly mortgage statements, processes payments, manages escrow accounts and responds to borrower inquiries.
Sometimes, the servicer is the same company that approved a borrower’s mortgage loan – but not always. Lenders may sell the servicing rights of your loan, and you may not get to choose your new servicer.
