Home Buying 101: Types of Home Loans

Updated on February 24, 2026: This story was originally published on September 14, 2020, and has been updated with new information.

Whether you are actively shopping for a new home or just starting to think about becoming a homeowner in the future, getting a mortgage is a large piece of homebuying success - and with a variety of home loan options, you might be wondering what type of home loan is right for you.

Spoiler: There is no one-size-fits-all answer. Different types of home loans have advantages for different people and situations, so getting pre-qualified is an important step to help you learn more about the options that fit your needs. During prequalification, you will provide your mortgage lender with information about your income, debts, and assets, and permission to check your credit. In turn, they will discuss the type of home loan that works best for your financial circumstances and the home you plan to buy.

Generally speaking, there are two overarching categories of home loans: Conventional mortgages and government-backed mortgages (FHA, USDA, and VA home loans). Additionally, there are two types of mortgage terms: Fixed-rate mortgages and adjustable-rate mortgages. We spoke with Home Solution Lenders to learn more about different types of home loans.

FHA Home Loan

The Federal Housing Administration (FHA) provides the most common type of government-backed mortgage, the FHA loan. FHA home loans have less stringent requirements than a conventional loan and often lower interest rates, making them a popular type of home loan for first-time homebuyers, though also available for repeat buyers and refinance loans.

To qualify for an FHA loan, you typically must meet these minimum requirements:

• Credit score: 500-579 with a 10% down payment, or 580 minimum with a 3.5% down payment.
• Debt-to-income ratio: Max of 46.99 front-end / 56.99 back-end, with acceptance from the Automated Underwriting System (AUS).
• Down payment: A minimum of 3.5% of the purchase price. Allowed to be gift money.
• Mortgage terms: 30-year fixed-rate, 15-year fixed-rate, and adjustable-rate mortgages.
• Occupy the home as your primary residence.

FHA loans must also meet property requirements and mortgage loan limits, which are set annually based on the county in which you are purchasing, and typically accommodate the purchase of an average residence in the area.

FHA mortgage insurance, also referred to as the Mortgage Insurance Premium (MIP), is built into every loan. You will pay a one-time 1.75% upfront mortgage insurance payment, which can be rolled in or added to your mortgage loan, plus monthly mortgage insurance as part of your mortgage payment. When you put less than 10% down, this mortgage insurance is paid for the life of the loan. If you put more than 10% down, it is cancelled after 11 years.

VA Home Loan

As a thank you to those who serve our country, VA home loans offer favorable terms to military veterans, active service members, and eligible surviving spouses. Private lenders provide VA home loans, and the Department of Veterans Affairs (VA) guarantees a portion of the loan.

To qualify for a VA home loan, you typically must meet these minimum requirements:

• Valid Certificate of Eligibility (COE)
• Credit score: No official requirement from the VA, though a 580 minimum is typically required by lenders.
• Debt-to-income ratio: No maximum, as loans are based off residual income, or the amount of money left over after paying necessary bills.
• Down payment: $0 required.
• Mortgage terms: 30-year fixed-rate, 15-year fixed-rate, and adjustable-rate mortgages.
• Must live in the house being purchased with the loan.

In addition to requiring no down payment, VA loans do not require PMI and offer competitive interest rates.

The VA home loan is a lifetime benefit, meaning it can be used multiple times. There is a one-time upfront VA funding fee of 2.15% for homebuyers using a VA loan for the first time, or 3.3% for subsequent use of a VA loan, and it may be waived in some situations, such as for homebuyers with a service-connected disability.

VA home loans are available for both purchase and refinance, and for first-time homebuyers and repeat homebuyers. To be eligible for a VA loan, there are additional requirements set by the VA, which can be found online on the U.S. Department of Veterans Affairs website.

USDA Home Loan

The third type of government-backed loan is the USDA loan. Less widely used, though a popular choice for those who qualify, USDA loans are guaranteed by the US Department of Agriculture, and available only on homes in designated eligible areas.

To qualify for a USDA Section 502 Guaranteed home loan, you typically must meet these minimum requirements:

• Household income must not exceed 115% of the area’s median household income.
  • In our Florida new home communities, the current limits range from $119,850-$123,750 for a household with 1-4 people, and $158,250-$163,350 for a household with 5-8 people.
• Credit score: 580 minimum for manual underwriting; 640 required for AUS approval.
• Debt-to-income ratio: Max of 29% front-end / 41% back-end for manual underwriting; 34% front-end / 46% back end with AUS approval.
• Down payment: $0 required.
• Mortgage terms: 30-year fixed-rate (for USDA Section 502 Guaranteed home loans).
• Occupy the home as your primary residence.

While USDA loans do not have PMI, they do include a USDA funding fee, which guarantees that loan losses are paid through the fees collected rather than taxpayer funds. Currently, borrowers are required to pay a one-time upfront guarantee fee of 1% of the loan amount, and an “annual” fee of 0.35% of the loan amount, which is paid as part of your monthly mortgage payment for the life of the loan.

Conventional Home Loan

Conventional home loans are not backed by a government agency, though conforming conventional loans often follow requirements from Fannie Mae and Freddie Mac, government-sponsored entities that buy mortgages from lenders, hence the encouragement to follow their guidelines. In addition, lenders may have their own requirements, also known as overlays, that homebuyers must meet.

Conventional loans are available for a new home purchase or refinance.

To qualify for a conventional mortgage, you typically must meet these minimum requirements:

• Credit score: No minimum; based on approval from the Automated Underwriting System (AUS).
• Debt-to-income ratio: 50% max back-end.
• Down payment: As low as 3% for first-time homebuyers, or 5% for non-first-time buyers.
• Mortgage terms: 30-year fixed-rate, 20-year fixed-rate, 15-year fixed-rate, 10-year fixed-rate, and adjustable-rate mortgages.

While conventional mortgages are available with as little as a 3% down payment, buyers who put 20% or more down appreciate the benefit of no private mortgage insurance (PMI). For buyers putting less than 20% down, PMI is required until you reach 22% equity (also referred to as 78% loan-to-value) in the home.

Non-QM Loans

Non-qualified mortgage, or non-QM loans, are a special type of conventional mortgage that may be an option for homebuyers struggling to qualify for a traditional conventional or government mortgage loan, such as:

• Self-employed borrowers;
• Real estate investors;
• Foreign nationals;
• Non-prime borrowers;
• Borrowers with significant assets.

Essentially, non-QM mortgage lenders use manual underwriting, which offers more flexible credit score and income standards, to qualify borrowers who are otherwise deemed risky based on things such as:

• A low credit score or negative credit events.
• Non-salaried income, using bank/investment account statements, 1099s, and assets to document income, whereas qualified mortgages require pay stubs and W2s. For DSCR (debt service coverage ratio) loans, ideal for real estate investors, the loan can be qualified based on the property's rental income.
• Those with a recent bankruptcy may not need to wait to qualify for a non-QM loan, whereas qualified mortgages require a 1 to 7-year waiting period.

Home Solution Lenders provided the following guidelines for non-QM loans:

• Credit score: No minimum; allows recent credit events.
• Debt-to-income ratio: No strict cap; DSCR programs may not use DTI.
• Down payment: As low as 10%, depending on the investor and risk grade.
• Income documentation options: Bank statements, asset depletion, DSCR, 1099-only.
• Prepayment penalties: Common on investment programs.
• Mortgage insurance: Not required.

Non-QM lenders are taking a risk by funding a loan that traditional mortgage guidelines deem risky. This means non-QM loans typically require a larger down payment, higher interest rates, and reserves to offset the risk. Also, non-QM mortgages are not required to meet standards set by the Consumer Financial Protection Bureau (CFPB). But for buyers in the right situation, non-QM loans provide a valuable opportunity.

Fixed Rate vs. Adjustable Rate Mortgages

The various types of home loans also offer different mortgage terms: Fixed-rate or adjustable-rate. While a fixed-rate mortgage is the most popular among U.S. homebuyers, each offers different advantages. Here's a breakdown on each type and the key differences.

Fixed-Rate Mortgages

With a fixed-rate mortgage, the interest rate remains the same for the entire life of the mortgage, meaning your mortgage principal and interest will never change. This reliability makes it a popular choice for homebuyers.

A 30-year fixed rate is the most common term, though 10-year, 15-year, and 20-year fixed rate terms are offered for some types of mortgages.

Keep in mind: A total mortgage payment also includes homeowners' insurance, property taxes, and PMI/MIP/funding fees (if applicable). While the principal and interest portion of your mortgage payment will always remain the same with a fixed rate mortgage, your monthly payment could change based on changes to insurance premiums and property taxes.

Adjustable-Rate Mortgages

With an adjustable-rate mortgage (ARM), the interest rate can adjust at preset intervals, after a fixed introductory rate. Typically, the introductory rate is fixed for 3, 5, 7, or 10 years, after which it adjusts every 6 months or 1 year. ARMs have a cap on how much they can adjust each time and a lifetime rate cap.

A big benefit of ARMs is that they typically have a lower introductory rate than a fixed-rate mortgage, meaning lower mortgage payments and significant out-of-pocket savings during the introductory rate period. Also, because you qualify at the introductory rate, it can offset debt-to-income ratios when qualifying or help you qualify for a larger mortgage amount.

Let's look at an example: With a 5/1 ARM, the rate is fixed for 5 years, then adjusts every 1 year. In our example, the loan terms cap the adjustment at 1%, with a maximum lifetime adjustment of 5%.

• Years 1-5: 3.49% interest rate.
• Year 6: 4.49% max. interest rate.
• Year 7: 5.49% max. interest rate.
• Year 8: 6.49% max. interest rate.
• Year 9: 7.49% max. interest rate.
• Maximum lifetime rate: 8.49%.

Before you get scared off by the lifetime rate, consider this:

• An ARM helps ease you into the costs of homeownership with a lower rate and payment during the introductory period.
• If you only plan to own the home for 5 years or less, you can save money with the ARM, knowing you'll likely sell before the rate adjusts.
• You can refinance to a fixed rate at any time! That means you can appreciate the low introductory payments from an ARM, then lock in a reliable fixed-rate payment.

Did you know: Your interest rate can adjust either up or down with an ARM? The ARM adjustment is based on an economic index, usually the U.S. Treasury index. That means your rate and monthly payment could actually decrease, instead of increasing.

Comparing Fixed-Rate and ARM Payments

Let's look at an example comparing payments for a fixed-rate mortgage and a 5/1 ARM, assuming mortgage rates available today through our lender partners, for a $350,000 mortgage, over a 5-year time period.

Thanks to the ARM rate providing a lower rate and monthly payment for the first 5 years, over 5 years, you will save $18,550 out of pocket with the ARM.

Additional Information

If you’re starting your homebuying journey and want to learn more about your homebuying power and the right type of home loan for your needs, your first step is to get prequalified with a Highland Homes lender partner! They will review your credit report, find out more about your needs, and discuss the types of home loans, interest rates, and mortgage options that best suit you. In addition, they may be able to help you qualify for Florida down payment assistance programs to help cover your down payment and other purchase costs.

Highland Homes builds new homes in Tampa Bay, Metro Orlando, Wildwood-The Villages, Ocala, Sarasota-Bradenton, and Lakeland-Winter-Haven. For more information about building your dream home in Florida, call or email our Florida New Home Specialists.

The information contained herein is for informational purposes only; not an offer to lend or a guarantee of prices, rates, terms, or availability.