There are many types of home loans available, which means that most people can find a loan that works for them. However, it can sometimes be overwhelming to try to understand all the types of loans out there. Today we are breaking down the main options into easy-to-understand descriptions so you know exactly what your alternatives are.

Fixed-rate and adjustable-rate mortgages

One of the first things to understand is the difference between fixed-rate and adjustable-rate mortgages. Most home loan programs offer either option and it’s up to the homebuyer to decide what works best for their needs.

Fixed-rate mortgage

Fixed-rate is the most common choice. It involves a single fixed interest rate that stays the same for the life of the loan. Generally, fixed-rate mortgages will be for between 15 and 30 years. They are a good option for a homeowner who wants to know exactly what their payments will be for years to come and for homeowners who expect to stay in their new home for at least five years.

Adjustable-rate mortgage

Also known as ARM, an adjustable-rate mortgage generally comes with a lower interest rate compared to a fixed-rate mortgage – but only for a period of time. After the agreed upon time has lapsed (usually five or ten years) the interest rate adjusts and as a result the payments adjust. This will generally happen once a year for the duration of the loan. The adjusting interest rate will be based on current interest rates at the time of the change, which means that if interest rates go up then your payments will go up as well. If interest rates go down, then so will mortgage payments.

ARM mortgages are often a good choice for a borrower who does not have good credit. They may not qualify for a good interest rate when they get their loan, but when it’s time for the loan to adjust they may qualify for a lower interest rate. This type of mortgage can also be a good choice for a homeowner who is not planning to stay in the home longer than the first adjustment.

Government loans

The federal government does not directly offer home loans but it does insure loans in the event the borrower cannot pay it. This makes the mortgage much safer for the lender and provides for the lowering of loan requirements.

FHA loans

A first-time homebuyer is more likely to get a Federal Housing Administration loan than any other. These can be attractive because they have lower credit score requirements compared to other types of mortgages. A person with a 500 FICO score can generally be approved for an FHA loan with just 10% down. A person with a FICO score of over 580 can pay just 3.5% down with an FHA loan.

Many first-time home buyers cannot afford even these reduced down payment requirements. The good news is that there are payment assistance grants. HUD offers a relatively comprehensive list of down payment assistance programs by state.

FHA 203K rehab loans

Also known as home renovation loans, this type of FHA loan can fund the purchase of a home and also pay for needed repairs and renovations. A typical FHA loan requires that a property is in livable condition when purchased and has some restrictions. For example, renovations not allowed with these loans include repair of outbuildings, swimming pools, furniture and cosmetic landscaping. A 203K allows buyers to choose fixer-upper homes and to get the money needed to make repairs. Though most of the requirements are the same for these loans as for the traditional FHA loan, the credit score requirement is higher at 640.

VA loans

Only available to veterans, VA loans have some great benefits. Most notably, a veteran can qualify for a home loan with no down payment. Another huge advantage is the fact that mortgage insurance is not required. Also known as PMI, the fact that this insurance is not needed saves the average veteran homeowner around $2,000 each year.

USDA loans

Most people know the U.S. Department of Agriculture (USDA) for providing food and nutrition services but that is not all they do. In rural parts of the United States, they also offer no-down-payment loans and low mortgage insurance fees. Though the term “rural” may make it seem as though only select properties qualify, but the USDA’s eligibility map shows that more than 95% of the country is currently eligible. These loans require at least a 640 FICO score.

Conforming home loans

Also known as conventional home loans, conforming home loans meets the requirements of Fannie Mae and Freddie Mac and are not insured by the government. Instead, they are offered by private lenders and have higher requirements for credit scores and down payments, in most cases. If a person is buying a property as an investment, then they are not eligible for a government loan and must instead choose a conforming/conventional home loan.

Share mortgages

Also known as co-op mortgages, this type of loan is different due to the fact that buying into a co-op is different than buying a home. When you buy a home or a condo, you get a deed that is then signed to the lender when the mortgage is secured.

With a co-op, there is no need for deeds for individual units. Instead, there is a single deed for the entirety of the building. As a result, a co-op mortgage is actually a loan that allows you to purchase a share in the co-op – hence the term “share loan” or “share mortgage.” Fewer lenders offer this type of loan compared to other more traditional loans, but those lenders that do tend to be experts who can help with the nuances of this particular type of loan.

Fannie Mae does secure co-op share loans, but the qualifications can be complex.

Eliza Theiss

Eliza Theiss

Eliza Theiss is a senior writer reporting real estate trends in the US. Her work has been cited by CBS News, Curbed, The Los Angeles Times, and Forbes among others. With an academic background in journalism, Eliza has been covering real estate since 2012. Before joining PropertyShark, Eliza was an associate editor at Multi-Housing News and Commercial Property Executive. Eliza writes for both PropertyShark and CommercialEdge. Reach her at [email protected]

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