How to Choose the Best Mortgage for You

Unless you can buy a home entirely for cash, finding the right property is only half the battle. The other half is choosing the best type of mortgage and the best lender. You'll likely be paying back your loan over a long period of time, so it's important to find one that meets your needs and budget.

What Is a Mortgage?

A mortgage is a loan taken out to purchase a home. As a borrower, you're entering a legal contract to repay your loan, with interest, over a set amount of time.

There are two components to your mortgage payment—principal and interest. Principal refers to the loan amount. Interest is an additional amount (calculated as a percentage of the principal) that lenders charge you for the privilege of borrowing money that you can repay over time. In comparing loans, you'll want to focus on the annual percentage rate (APR), which represents the total cost of a loan, including both the interest rate and other loan fees.

During the term, or length, of your mortgage, you will pay the lender in monthly installments based on the loan's amortization schedule.

6 Main Types of Mortgages

As you'll see from the descriptions below, some mortgage programs and lenders have more stringent guidelines than others. Some might require a 20% down payment, for example, while others will accept as little as 3% (or even 0%) down.

To qualify for certain types of loans, you will need to have pristine credit. Others are geared toward borrowers with less-than-stellar credit scores or other financial issues. Government-guaranteed loans tend to have the most relaxed credit and down payment requirements.

Here's a rundown of the most common types of mortgages. Note that there is some overlap between categories.

1. Conventional Mortgages

A conventional loan one that is not backed by the federal government. Borrowers with very good credit, stable employment and income histories, and the ability to make the lender's required down payment can usually qualify for one.

To avoid paying for private mortgage insurance (PMI), however, borrowers generally need to make at least a 20% down payment.

2. Conforming Mortgage Loans

Conforming loans are bound by maximum loan limits set by the federal government. These limits vary by geographic area. For 2024, the Federal Housing Finance Agency (FHFA) set the baseline conforming loan limit (CLL) at $766,550 for one-unit properties.

The FHFA allows a higher maximum loan limit in certain parts of the country (for example, in New York City and San Francisco) to reflect the price of housing there. Higher loan limits also apply in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

Mortgages that meet the requirements for conforming loans are eligible for repurchase by Fannie Mae and Freddie Mac, two government-sponsored enterprises regulated by the FHFA that buy most of the mortgages issued by private lenders and sell them to investors.

3. Non-Conforming Mortgage Loans

Non-conforming loans generally can't be bought or sold by Fannie Mae and Freddie Mac due to the loan amount and underwriting guidelines. Jumbo loans are the most common type of non-conforming loans. They're called jumbo because the loan amounts typically exceed conforming loan limits.

These loans are riskier to a lender, so borrowers typically must show larger cash reserves, make a larger down payment, and have strong credit. They may also pay a somewhat higher interest rate.

4. Government-Insured Federal Housing Administration (FHA) Loans

Federal Housing Administration (FHA) loans have more relaxed credit score requirements than conventional loans. The FHA doesn't lend the money but instead guarantees loans made by FHA-approved lenders, reducing the lenders' risk.

One drawback to FHA loans is that borrowers must pay both upfront and monthly mortgage insurance premiums (MIPs) for either 11 years or the entire life of the loan.

FHA loans are best for low- to moderate-income borrowers who can't qualify for a conventional loan product or anyone who cannot afford a significant down payment. Borrowers with a FICO score as low as 500 can qualify for a 10% down payment and those with scores of 580 or above may qualify for a 3.5% down payment.

Many people mistakenly believe that FHA loans are available only to first-time buyers. But repeat borrowers can qualify for FHA loans as long as they're buying a primary residence, not an investment property and meet the other requirements.

5. Government-Insured Veterans Affairs (VA) Loans

The U.S. Department of Veterans Affairs (VA) guarantees mortgages for qualified military service members, veterans, and their spouses. Borrowers can finance 100% of the loan amount, with no required down payment.

Other benefits include fewer closing costs (which may be paid by the seller), better interest rates, and no need for PMI or MIP.

VA loans charge some borrowers a funding fee, which is a percentage of the loan amount that helps offset the cost to taxpayers. The funding fee varies depending on your military service category and loan amount.

The following borrowers do not have to pay the funding fee:

• Veterans receiving VA benefits for a service-related disability
• Veterans who would be entitled to VA compensation for a service-related disability if they didn't receive retirement or active duty pay
• Surviving spouses of veterans who died in service or from a service-related disability
• A service member with a proposed or memorandum rating stating eligibility for compensation due to a pre-discharge claim
• A service member who received the Purple Heart

VA loans can be best for eligible active military personnel or veterans and their spouses who want highly competitive terms and would prefer not to make a down payment.

6. Government-Insured U.S. Department of Agriculture (USDA) Loans

The U.S. Department of Agriculture (USDA) guarantees loans to help make homeownership possible for low-income buyers in rural areas nationwide. These loans require little to no money down for qualified borrowers as long as properties meet the USDA's eligibility rules.

USDA loans are best for homebuyers in eligible rural areas with lower household incomes, little money saved for a down payment, and who couldn't otherwise qualify for a conventional loan product.

Fixed-Rate Mortgages

Many of the loan types listed above come in the form of fixed-rate mortgages.

Fixed-rate mortgages have a set interest rate for the life of the loan, usually from 10 to 30 years.

If you want to pay off your home faster and can afford a higher monthly payment, a shorter-term fixed-rate loan (say, 15 or 20 years) will save you interest over the long term. You'll also build equity in your home faster.

Opting for a shorter fixed-rate mortgage means that your monthly payments will be higher than with a longer-term loan. So crunch the numbers to ensure that your budget can handle the higher payments. You may also want to factor in other financial goals, such as retirement savings or building an emergency fund.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) have a fixed interest rate for an initial period, such as three, five, seven, or 10 years. Once that period ends, their rate will fluctuate with market conditions. These loans can be risky if you're unable to handle a higher monthly mortgage payment after the rate resets, although ARMs often have caps on how high and how fast your interest rate can rise.

ARMs can be a solid option if you don't plan to stay in the home beyond the initial fixed-rate period or if you intend to refinance before the loan resets. That's because the interest rates on ARMs tend to be lower than those on fixed-rate mortgages in the early years of repayment.

However, it can be dangerous to count on being able to sell your home or refinance your mortgage before your ARM resets because market conditions—and your finances—could change.

First-Time Buyer Assistance Programs

Special programs sponsored by some states or local housing authorities offer help to first-time buyers. Many are available based on the buyers' income or financial need.

These programs, which usually take the form of down payment grants, can also save first-time borrowers significant money on closing costs.

The U.S. Department of Housing and Urban Development (HUD) lists first-time homebuyer programs by state.

Some of the mortgage types described above also have special programs to aid first-time homebuyers.

The Bottom Line

You may be eligible for one or more types of mortgages, depending on your income, credit history and credit score, and employment. Mortgage lenders can help you analyze your finances and determine the most suitable loan products. They can also help you better understand the qualification requirements, which can sometimes be complex.

Also note that it can be advantageous to pursue financing before you start looking at homes and making offers. You'll be able to act more quickly and may be taken more seriously by sellers if you have a pre-approval letter in hand.