Common Types of Mortgages: A Guide to Conventional, FHA, VA and USDA Loans

Buying a home is an exciting milestone for many Americans, but arranging financing to complete the purchase can be complicated. A mortgage—essentially a loan to buy real estate—allows a potential homeowner to spread out repayment over years or decades. Mortgages come in several main varieties, each with its own requirements, benefits and costs. Understanding the most common mortgage types can help buyers find the best loan for their needs and budget.

What is a Mortgage and Why Do You Need One?

Simply put, a mortgage is an agreement which allows a home buyer to finance the purchase of real estate over time. Very few home buyers have the cash on hand to pay the full purchase price upfront. Mortgages provide the borrowed capital to close the deal.

The buyer repays the amount borrowed plus interest, typically over 15 or 30 years. This converts the high upfront cost of homebuying into affordable monthly payments. Mortgage payments usually also cover related costs like property taxes and insurance premiums.

Without mortgages, home ownership would only be possible for wealthy cash buyers. Access to financing has helped generations of Americans buy homes even with limited savings.

Overview of Key Mortgage Types

While specifics vary, mortgages fall into a few major categories:

Conventional loans are those provided directly by banks and lenders like credit unions without government backing. These make up about two-thirds of mortgages.

FHA loans are insured by the Federal Housing Administration. These help buyers with lower credit scores or savings.

VA loans help eligible military service members by requiring no down payment or private mortgage insurance.

USDA loans promote home ownership in rural areas by waiving down payment requirements for qualifying borrowers.

Below we’ll explore the defining features, pros and cons of each variety in more detail. Understanding these key differences can help you decide what type of mortgage aligns best with your financial profile and home buying goals.

Conventional Loans

Of purchased homes financed with a mortgage, around 67% use a conventional home loan according to 2021 Home Mortgage Disclosure Act data. These are mortgages issued directly by banks, credit unions and other private lenders without any government backing.

You’ll generally need strong credit and a 20% down payment to qualify for a conventional loan with the best terms. But requirements vary by lender.

Eligibility and Down Payment

To get approved, you’ll likely need:

• A credit score of at least 620, preferably 740+ for the lowest rates

• A debt-to-income ratio under 50% in many cases

• Verified income to confirm you can afford payments

• At least 20% down to avoid costly private mortgage insurance

With a lower credit score or down payment under 20%, you may still qualify but pay more in interest or fees. Conventional 97 loans allow down payments as low as 3%.

Benefits

Better rates – Conventional loans often have lower interest rates than government-backed mortgages. This can save substantially on finance charges over your loan term.

Predictable payments – Most conventional mortgages have fixed interest rates. This stability helps home budgets long-term.

Less paperwork – Conventional loans don’t involve as much bureaucracy as varieties requiring government approvals.

Drawbacks

Strict approval criteria – Without special eligibility programs, conventional mortgage qualification standards can be tougher for buyers with past credit troubles or limited savings.

Private mortgage insurance – If your down payment is under 20% of home value, you’ll pay added insurance costs each month until you reach that threshold.

Higher upfront costs – Coming up with a 20% down payment can be challenging. And conventional loans charge higher origination fees in some cases.

So who should consider a conventional loan? They often make sense if you have great credit, enough savings for a sizable down payment, and want mortgage stability.

Now let’s look at special affordable mortgage programs offered or insured by government agencies.

FHA Loans

Federal Housing Administration loans help make homeownership possible for buyers who can’t afford a large down payment or meet strict conventional lending criteria. About 16% of home mortgages fall into this category according to recent stats.

The FHA insures approved lenders against defaults. This protection means banks can safely offer mortgages requiring as little as 3.5% down with flexible credit and debt requirements. FHA loans do come with borrowing limits and added costs, however.

Eligibility and Down Payment

FHA loan qualification guidelines include:

• A credit score starting at just 500 if you make a 10% down payment

• Options for down payments from 1.25% to 10% of the purchase price

• Maximum debt ratios of 57% with additional compensating factors

So FHA mortgages allow much more flexibility than conventional loans. They’re designed specifically to help buyers with past financial issues recover and achieve ownership.

Benefits

Low down payments – FHA lending programs let buyers purchase with as little as 3.5% down. This opens doors for borrowers with limited savings.

Lenient credit guidelines – An FHA loan accepts credit scores under 600 or even 500 in some cases. They offer a lifeline for owners with past struggles.

Streamlined borrowing process – FHA loans conform to standard approval requirements, so underwriting moves quickly.

Drawbacks

Mortgage insurance premiums – FHA borrowers pay added insurance fees amounting to 1.5% of loan value per year. This increases long-term costs.

Lower borrowing limits – The maximum FHA loan range won’t finance large luxury home purchases. Caps vary but run $420,000 to $800,000 depending on area median home prices.

Strict ratios on multiple properties – Someone who already has an FHA mortgage on their home won’t easily qualify again until the first nears repayment.

In short, FHA mortgages offer great financing access for first-time or struggling buyers. Just be aware that expanding government backing leads to certain restrictions and insurance fees.

VA Loans for Service Members

Eligible veterans, active duty or reserve service members, National Guard members and select surviving military spouses can access zero down payment VA mortgages with no private mortgage insurance requirements. About 13% of mortgages last year fell under the Department of Veteran Affairs umbrella.

Because the VA guarantees part of these loans against default, underwriting rules are more flexible than conventional loans. This gives military families expanded home buying power as a hard-earned benefit.

Eligibility and Down Payment

Basic requirements for VA borrower eligibility include:

• Serving minimum duty period; exact length depends on service era

• Good standing discharge; dishonorable discharges disqualify approval

• VA minimum credit score requirements of 620, or 580 with income to offset risk

Benefits

No (or low) down payments – Eligible buyers can finance 100% of the purchase price with a VA loan in most cases. This helps military families buy without large savings.

No mortgage insurance premiums – Unlike FHA loans, VA borrowers pay no added monthly insurance costs.

Better rates – Thanks to underwriting protections for lenders, VA loan rates often beat conforming options.

Drawbacks

Funding fee – VA mortgages do charge an upfront funding fee equal to 2% to 3% of the borrowed amount. This cost gets rolled into loan balance. Buyers may apply to have this charge waived if recovering from injury.

Strict approvals – While VA guarantees parts of these loans, private lenders still ensure borrowers are reasonably able to make payments long term.

For qualifying service members, VA loans offer awesome benefits helping military families buy homes with minimal savings or great credit.

USDA Loans to Aid Rural Development

A little known mortgage option, USDA home loans help lower-income buyers in designated rural and some suburban counties get approved with no down payment. In 2021, USDA mortgages accounted for a slim 1% of purchased home loans. But for qualifying rural residents, they bring big benefits.

The Department of Agriculture partners with approved lenders to issue these 100% financing loans. They want to encourage home ownership and revitalize rural areas by allowing very affordable financing options.

Eligibility and Down Payment

To qualify for one of these $0 down payment mortgages, buyers generally need:

• Income at or below 115% of median household income for the county

• Credit score of at least 640; more flexibility for lower scores with manual review

• First-time homebuyer status in many cases

• Purchase property in an eligible rural or suburban zone as defined by the USDA

Benefits

Zero down payments – People who can’t save for higher down payments of 3% to 20% can still finance a home purchase through USDA 100% mortgages.

Low rates – Given the government backing, USDA home loans offer competitive interest rates.

Low payments and costs – Beyond zero down, sellers can contribute to closing costs. And no private mortgage insurance gets charged.

Drawbacks

Home resale restrictions – Those obtaining USDA loans must agree to cap appreciation at a moderate percentage when selling, keeping things affordable long term.

Availability – Only 40% of U.S. counties currently meet rural area definitions required for eligibility.

First-time homebuying requirement – Repeat buyers don’t qualify for these special affordable financing packages meant to promote access.

For a buyer struggling to put away even a few thousand for a normal loan, USDA financing makes ownership dreams reality.

Choosing the Best Mortgage Type

Determining which mortgage option best aligns with your financial profile depends on savings, income, credit health and plans. Here are some key questions to consider:

How much can you afford in down payment? Options range from the 3% FHA minimum to 20% for conventional loans avoiding private mortgage insurance.

Does your credit score qualify? Each variety has thresholds, starting around 500 for FHA to a preferred 740 for conventional.

Do loan limits accommodate your target home price? FHA caps may limit luxury purchases in some high cost areas.

Can you meet location requirements? USDA rural development loans only work in qualifying outer regions while VA loans need to finance primary residences.

How long is your ownership timeline? Shorter durations may merit lower upfront costs over better longer term savings on interest rates and mortgage insurance.

While shopping, get pre-qualified to view personalized product eligibility. A mortgage broker can explain how factors like assets, income, debts, credit and property value determine what loans suit you best. They can then help you identify affordable monthly payments at competitive rates.

Owning a home remains a critical building block supporting financial health and wealth-building for most American families. Understanding the most common mortgage varieties—from conventional to specialized loans for veterans, rural residents and first-time buyers—is the essential first step toward finding the right financing fit.