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Mortgages

How to know which of these common mortgage types is right for you

We untangle the acronyms and jargon to help you choose a mortgage that makes sense for you.

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The only path to homeownership for most Americans — securing a mortgage loan — is riddled with enough variables and complexities to give even the most determined buyer second thoughts. But if you take the time to understand the basics of the most common mortgage types, you'll be able to choose a loan that helps put a roof over your head without dragging down your finances.

CNBC Select breaks down the most common types of home loans, including their requirements, terms and benefits, to help you compare their pros and cons and make an informed decision.

Picking the right home loan type for you

A home loan type has a huge impact on your home-buying process — from how much you'll need for a down payment to your down payment assistance options, to your choice of lender. Some of CNBC Select's favorite lenders include Navy Federal Credit Union, an excellent option if you're looking for a VA loan, while PNC Bank is worth considering for a USDA loan. If you need a jumbo loan, on the other hand, we recommend SoFi for a lower down payment and no private mortgage insurance (PMI).

Navy Federal Credit Union

  • Annual Percentage Rate (APR)

    Apply online for personalized rates

  • Types of loans

    Conventional loans, VA loans, Military Choice loans, Homebuyers Choice loans, adjustable-rate mortgage

  • Terms

    10 – 30 years

  • Credit needed

    Not disclosed but lender is flexible

  • Minimum down payment

    0%; 5% for conventional loan option

Terms apply.

PNC Bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan and Medical Professional Loan

  • Terms

    10 – 30 years

  • Credit needed

    620

  • Minimum down payment

    0% if moving forward with a USDA loan

Terms apply.

The right type of mortgage for you will depend on several factors, such as your credit score and income, how much you're hoping to borrow and more. Below, we're going to take a closer look at each type.

Conforming and nonconforming loans

A conforming mortgage loan meets the underwriting guidelines of Fannie Mae and Freddie Mac and is at or below the loan limits set by the Federal Housing Finance Agency (FHFA). Generally, lenders are more willing to offer this type of loan since they can sell these mortgages in the secondary market.

The conforming loan standards include:

  • Loan limits: In 2023, the loan amount can't exceed $726,200 for most parts of the U.S. but can be higher in some high-cost housing markets.
  • Credit score: Most lenders require a credit score of at least 620 for a conforming mortgage loan.
  • Debt-to-income ratio (DTI): Generally, lenders require a DTI of 45% or lower to qualify a borrower for a conforming loan.
  • Down payment: Qualified borrowers might be able to put as little as 3% down.

Nonconforming loans don't meet the above standards and tend to come with higher interest rates and fees, and at times, stricter requirements. At the same time, they can be accessible to more borrowers, including those with a high DTI ratio or a low credit score. However, the Consumer Financial Protection Bureau (CFPB) warns that "many of the loans that got people in trouble during the [2008] crisis fell in the "non-conforming..." category." If you want to take on a nonconforming loan, be sure your finances can bear the burden.

An example of a nonconforming loan

A jumbo loan is a type of nonconforming mortgage because the loan value exceeds the conforming loan limits. Usually, you'll need this type of loan to purchase a high-value property. Unlike nonconforming mortgage loans targeting borrowers with bad credit, jumbo loans have strict qualification standards. They may require a high credit score (think 700 and up), a down payment of 10% or greater and proof of significant cash reserves.

Fixed-rate and adjustable-rate mortgage (ARM)

Fixed-rate mortgages maintain the same interest rate over the life of the loan. For instance, if you get a 30-year mortgage at a 5% interest rate, that is what you'll pay for 30 years (unless you refinance or sell the property).

An adjustable-rate mortgage (ARM) carries an interest rate that stays constant for a set amount of time but can change afterward. Typically you'll pay a low fixed rate for the first few years, and then your interest will change periodically depending on market conditions.

A fixed-rate mortgage offers consistency and predictability. On the other hand, an ARM might make more sense in a high-interest-rate market or when you're planning to live in the home for a short time (less than 10 years).

Conventional mortgage

A conventional mortgage loan is made through a private lender, such as a bank, credit union or mortgage company. It's the most common type of mortgage loan. A conventional mortgage can be conforming if it meets the required criteria and is backed by Fannie Mae or Freddie Mac.

Nonconforming conventional mortgages don't follow the same standards and can vary widely in eligibility requirements, interest rates and other features.

Government-backed mortgage

As the name implies, government-backed mortgages are insured by government agencies, which makes them less risky for lenders. If the borrower defaults, the government agency in question will foot the bill.

These mortgage loans can offer unique benefits, such as more lenient down payment or credit score requirements, as well as lower interest rates.

Examples of government-back mortgage loans include:

FHA loan

This type of mortgage loan is insured by the Federal Housing Administration (FHA). An FHA loan requires a credit score of just 580 and a down payment of 3.5%. And if you can put 10% down, the credit score requirement drops to 500.

Note, however, that if you put less than 10% down, you'll have to pay mortgage insurance for the entire loan term. If you put down at least 10%, the upfront mortgage insurance premium (MIP) can be removed after 11 years of payments. To compare, conventional loans only require mortgage insurance if you put less than 20% down and you can request to remove it once you reach 20% equity.

VA loan

A VA loan is insured by the Department of Veteran Affairs and can allow you to buy a home with no money down. This type of loan also doesn't require mortgage insurance — instead, homebuyers pay a funding fee, which is typically 2.15% of the loan amount. Veterans can pay the fee at closing or roll it into the loan amount.

To qualify for a VA loan, you must meet the minimum active-duty service requirements.

USDA loan

The United States Department of Agriculture insures USDA loans. These loans charge no mortgage insurance premiums and require no money down. Instead, you'll pay a one-time guarantee fee (1% of the loan amount) and the annual fee (0.35% of the loan balance).

USDA loans are only available for properties in designated rural areas. You'll also need to meet income requirements. You can learn more on the program's website.

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Bottom line

As you can see, you may be able to pick from multiple types of home loans — and what's best for you depends on your financial situation and personal preferences. Before you decide on the type, talk to multiple lenders and consider your options. Remember: while a type of mortgage loan might look perfect on paper, you want to compare all costs in the short and long term to figure out what loan type (and lender) can offer you the best deal.

Catch up on CNBC Select's in-depth coverage of credit cardsbanking and money, and follow us on TikTokFacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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