Types of Home Loans Explained

This content may include information about products, features, and/or services that The Federal Savings Bank does not provide and is intended to be educational in nature. 

Many homebuyers have a hard time wrapping their heads around the different types of home loans that may be available to them. Understanding these different mortgage options, however, can help you secure the right kind of mortgage for your unique needs. Some are well-suited to first-time homebuyers, borrowers with lower credit scores, borrowers purchasing in high-cost areas, and more.  

In this article, we will give you a primer on conventional and jumbo loans, government loans, and fixed-rate versus adjustable-rate mortgages. Then, we’ll offer some tips to help you assess which loan type could suit your situation.

How Mortgages Work

Mortgages are loans you can use to buy real estate. Though there are many different types of mortgages, they tend to share many of the same traits. Mortgages generally have a set term, most often between 15-30 years. Borrowers will be responsible for paying the principal and interest for the mortgage, usually in monthly installments.  

Lenders, such as The Federal Savings Bank, usually require borrowers to meet certain criteria to qualify for each type of loan, including factors like credit score minimums, debt-to-income (DTI) ratios, down payments, and more.

Fixed-Rate vs Adjustable-Rate Mortgages (ARMs)

A fixed-rate mortgage gives borrowers a consistent interest rate over the entire life of the loan. That makes budgeting much simpler, as your monthly principal and interest payment will be more predictable. If you plan to stay in your home for more than five years, this could be a good loan term to seek out.  

An adjustable-rate mortgage (ARM) generally begins the loan term with a lower initial interest rate than you might be able to find in a fixed-rate loan. However, once that initial period ends, the interest rate can change every year, meaning when rates increase, so too will your monthly payments. The inverse can also be true. So, if you aren’t sure whether you’ll live in the home longer than the initial rate, this could be worth looking into.  

Note that these terms (fixed-rate mortgage and adjustable-rate mortgage) are describing the loan terms. Depending on your lender and your financial circumstances, you may be able to apply either type of loan term to the mortgage types we’ll discuss below.

Conventional Loans

Conventional loans are the most common type of mortgage; it’s probably what you think of when you think of mortgages. These are loans that are not tied to specific government agencies or programs.  

If you don’t qualify for the government loans, or you do, but you are purchasing a second home, you likely will want to look for one of these. Borrowers with strong credit and the ability to contribute at least a 3% down payment on the home are often well-served by conventional mortgages. The higher your credit score and down payment, the more likely you are to find relatively lower rates. 

Broadly, you will find that conventional loans come in two shapes: Conforming and nonconforming.

Conforming vs Nonconforming Loans

Whether a loan is conforming or not is determined by the guidelines set by the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac. The latter two entities are not government agencies, but rather government-sponsored enterprises.  

The single-unit home loan limit for 2025 in most parts of the United States is $806,500 but can get up to $1,209,750 in specific higher cost of living areas. Conforming loans fall within those loan limits, and nonconforming loans generally, but not always, exceed them. A loan can also be nonconforming if the borrower doesn’t meet credit requirements or has an unusually low down payment, for example.

Jumbo Loans

Jumbo loans can help borrowers buy homes that exceed the conforming loan limits. However, because these loans have such high costs, it is not uncommon for lenders to set stricter requirements and higher interest rates when compared to conforming loans. If you are buying in a high-cost of living area or just looking for a more expensive home, jumbo loans might be your best bet.

Government-Backed Loans

Government-backed loans, despite the name, are not loans that are provided by the government. Rather, these loans are insured, or guaranteed, by government agencies to help eligible borrowers qualify for a home loan, and they are provided by private lenders.

Veterans Affairs (VA)

A VA loan is a mortgage loan in the United States guaranteed, or insured, by the U.S. Department of Veterans Affairs (VA). This loan was designed to offer long-term financing to eligible American veterans, active duty servicemembers, and certain surviving spouses. Some of the advantages of a VA loan for eligible borrowers include: 

• Possibility of zero down payment needed  

• Potential opportunity for a streamlined IRRRL (Interest Rate Reduction Refinance Loan)  

• The mortgage is assumable 

• No private mortgage insurance (PMI) required   

• The VA Funding Fee can be financed into the loan 

• There are no pre-payment penalties 

• The seller can assist with standard closing costs (up to 4%) 

VA eligibility requirements vary depending on when you served. Each lender may have their own credit score minimum, though the VA does not have a minimum score. Borrowers must acquire a Certificate of Eligibility (COE) from the VA to get a VA loan. Note that VA loans can only be used for primary residences, and each home must pass a VA appraisal.

Federal Housing Administration (FHA)

Similar to the VA loan, the FHA loan is insured by the FHA and provided by private lenders. Some of the benefits of an FHA loan include: 

• Small down payment requirement on purchases (3.5%) 

• Higher approvable debt-to-income ratio 

• Less stringent credit requirements 

• Non-occupying co-borrowers allowed 

• Seller paid closing costs (Up to 6%) 

• Reduced documentation requirements on Streamline (FHA to FHA) Refinances 

Though all sorts of borrowers use FHA loans, some common types include: First time homebuyers, borrowers with limited assets or credit history, and borrowers with tighter monthly income. Also, as with the VA loan, borrowers must intend to occupy the home as their primary residence within 60 days of closing.

United States Department of Agriculture (USDA)

The USDA has a Single Family Housing Guaranteed Loan Program which helps approved lenders provide low-to-moderate income households the chance to own adequate, safe, and sanitary homes as their primary residence in eligible rural areas. Borrowers will be ineligible for USDA loans if they meet all of these five criteria: 

1. The Borrower has sufficient liquid assets for 20% down payment. Funds in retirement accounts and non-liquid assets are not included. 
2. The Borrower can pay all prepaids & closing costs in addition to the 20% down payment. 
3. DTI Ratios do not exceed 28/36. 
4. The Borrower is eligible for a Conventional 30 Year Fixed Rate Mortgage without PMI. 
5. The Borrower credit qualifies for the Conventional 30 Year Fixed Rate Mortgage. 

If you are eligible for a USDA loan, you do not need a down payment for your home purchase. You would be able to buy a single-family home, warrantable condo, a planned unit development (PUD), or certain manufactured homes. Borrowers who qualify for this loan and are interested in the slower living of a rural community may want to consider this option.

Which Loan Type Sounds Right for You?

Each of the types of home loans discussed above have their own merits that make them more suitable for certain borrowers than others. If you qualify for VA loans, for example, it could be wise to pursue that option instead of conventional financing. Every borrower’s needs are different, though. If you want to know more about any of these loan types and how they might work for you, reach out to our bankers for one-on-one guidance.