Facebook
X
Pinterest
Copy Link
Mortgage Types Explained: What You Need to Know Before You Start Looking at Houses
Mortgage types and property choices are tied together. Some loan programs don’t like “fixer uppers.” Others limit where you can buy, how you can occupy the home, or what condition it must be in at closing. Those rules can kill a deal late in the game if you ignore them up front.
If you’re using USDA, you’ll be looking in areas that meet USDA’s rural definition—generally communities or unincorporated areas with populations under 20,000. It’s not just tiny towns; sometimes it’s the edges of major metro areas. If you’re using FHA, VA, or USDA, the property must meet stricter condition standards. True “fixer uppers” usually don’t qualify.
Thanks to home-flipping shows, most real fixers never hit the regular market anyway. They’re sold to “We Buy Ugly Houses”-type outfits or to the REALTOR® who went out to talk to the owner about listing the property in the first place.
Bottom line: your loan program shapes your home search. That’s why we’re talking about mortgage types before we start opening doors in Step 7.
The Big Mortgage Types Most Buyers Hear About
Most first-time buyers end up looking at some combination of:
- Conventional loans (backed by Fannie Mae/Freddie Mac)
- FHA loans (Federal Housing Administration)
- VA loans (Department of Veterans Affairs)
- USDA Guaranteed loans (rural housing, through regular lenders)
There are also jumbo loans (for amounts above standard loan limits), adjustable-rate mortgages (ARMs), and a variety of in-house or specialty programs that banks and credit unions offer—sometimes quietly.
We’ll hit the highlights of each, then talk about one of the most misunderstood parts of the mortgage world: mortgage insurance.
Conventional Loans: The “Plain Vanilla” Mortgage
For many borrowers, a conventional loan is the default option. These loans follow guidelines set by Fannie Mae and Freddie Mac and are what most people think of when they hear “standard mortgage.”
Typical features:
- Often 3%–5% down for well-qualified first-time buyers (20% down is ideal, not required).
- Flexible on property type and condition compared to FHA/VA/USDA, but still subject to appraisal and basic safety standards.
- Available with fixed or adjustable rates (we’ll talk about ARMs in a moment).
Conventional loans can be a great fit if your credit is solid, your debt-to-income ratio is reasonable, and you’re buying a home in good condition.
FHA Loans: Lower Down Payment, Tighter Property Rules
FHA loans are designed to help buyers who may have lower credit scores, smaller down payments, or more complex financial histories.
Typical features:
- Minimum 3.5% down payment for most borrowers.
- More forgiving of past credit issues than conventional in many cases.
- Stricter property standards—FHA wants the home to be “safe, sound, and secure.” Major deferred maintenance can be a problem.
Because of the property rules, FHA is not a fixer-upper loan. If the home needs obvious repairs, the seller may have to fix them for the loan to close.
VA Loans: A Powerful Benefit for Veterans and Eligible Service Members
In a military town like Abilene, VA loans matter. They’re one of the best benefits available to eligible veterans, active-duty service members, and certain surviving spouses.
Typical features:
- Often 0% down—true 100% financing for qualified borrowers.
- No monthly mortgage insurance, though there is usually a VA funding fee (which can be financed).
- Property condition standards similar to, and sometimes stricter than, FHA.
Not every seller is excited to see VA on an offer because they know repairs may be required and closing costs may shift. When I work with sellers—especially veterans—I always encourage them to consider VA offers seriously. In a town with a large retired-military population, turning away VA buyers means turning away people who have served 20+ years and earned that benefit.
USDA Guaranteed Loans: Rural, Not Farm
USDA offers two main home loan programs. The one most buyers see is the USDA Guaranteed loan, which is issued by regular lenders and backed by USDA.
Typical features:
- Generally 0% down for eligible borrowers.
- Income limits and location requirements—the home must be in an eligible rural area.
- Property condition standards similar to FHA/VA.
If you’re open to buying just outside town, USDA Guaranteed can be a powerful option. You or your lender can quickly check whether a specific property address is in an eligible area.
USDA Direct Loans: Powerful but Complicated
The other program is USDA Direct. I used to work for USDA Rural Development on the Direct side, and I can tell you: it’s a very different animal.
USDA Direct is aimed at very-low- and low-income buyers purchasing in rural areas. The government is the lender, not a bank. Terms can stretch to 33 or even 38 years, and some borrowers qualify for payment assistance that reduces their effective interest rate—sometimes as low as 1%.
That sounds great, but there are tradeoffs:
- Finding “decent, safe, and sanitary” housing in the price range can be difficult.
- The payment assistance is deferred interest, not free money. It often has to be repaid when you sell, refinance, or pay off the home.
- Because your lender is the federal government, walking away is not an option—old debts can follow you into tax refunds and even Social Security benefits.
- Closings are slow. USDA is not a bank with a vault; funds come from the U.S. Treasury. Government shutdowns and funding gaps can delay everything.
If USDA Direct is your only path to homeownership, it can still be worth pursuing—but you need to go in with eyes wide open. I’ve written a deeper dive into USDA-Direct Loans: You can find it here.
Now that you’ve seen Mortgage Types Explained across the major programs, it becomes clear why your lender and REALTOR® help narrow the field early.
Specialty and In-House Loan Programs
Many lenders offer products that don’t fit neatly into the big four categories.
Examples I’ve seen include:
- A minority-majority loan aimed at minority borrowers purchasing in census tracts that are just over 50% minority.
- Programs for borrowers with Individual Taxpayer Identification Numbers (ITINs) instead of Social Security numbers—often used by Dreamers/DACA recipients and other non-citizens.
- Down payment assistance and first-time buyer programs from groups like the Texas State Affordable Housing Corporation (TSAHC) and even city-level initiatives.
These programs can be extremely helpful—but they usually come with income limits, purchase price caps, and location rules. When your budget is already tight, meeting every requirement can be challenging.
My number one piece of advice here is simple:
Always ask your lender: “Do I qualify for any other programs—either in-house or external—and how do they compare to a conventional loan in both monthly payment and total cost over the life of the loan?” While your Realtor may know about some programs, your lender is your go-to reference.
A good lender will walk you through several scenarios, not just push the one product they like best.
Adjustable-Rate Mortgages (ARMs): Why I’m Cautious
ARMs still exist, and in some situations they can make sense. But we can’t talk about mortgage types without remembering the housing crisis in the 2000s. A big part of that mess came from poorly underwritten ARMs—teaser rates that looked affordable for a few years and then reset to painful levels.
ARMs are built on a story: “You’ll be making more money later,” or “You’ll sell or refinance before the rate adjusts,” or “Maybe a rich relative will leave you something.” Those are all aspirational. They’re not guaranteed.
My advice is straightforward: buy the house you can comfortably afford today. If your income improves or your situation changes, you can upgrade later. Betting your home on the future is a risky move.
Jumbo Loans and Other Outliers
If you’re buying a higher-priced property that exceeds standard loan limits, you may be looking at a jumbo loan. These often require:
- Larger down payments,
- Stronger credit, and
- More cash reserves.
Most first-time buyers in my market won’t be dealing with jumbo loans, but if you are, expect tighter underwriting and fewer “creative” options.
Mortgage Insurance: Who It Really Protects
The word “insurance” makes a lot of people think, “If something goes wrong, this pays off my house.” That’s not what mortgage insurance does.
Mortgage insurance exists to protect the lender when you can’t put 20% down. You’re paying the premiums; the lender gets the protection.
Mortgage Insurance on Conventional Loans (PMI)
On most conventional loans with less than 20% down, you’ll pay private mortgage insurance (PMI). Key points:
- PMI is usually a monthly fee added to your payment.
- Once your loan balance drops to around 80% of the home’s value (sometimes sooner with appreciation and a new appraisal), PMI can often be removed.
- That means PMI on a conventional loan is usually temporary.
Mortgage Insurance on FHA Loans (MIP)
FHA loans use a different structure called Mortgage Insurance Premium (MIP):
- An upfront MIP amount (usually financed into the loan), and
- An ongoing monthly MIP added to your payment.
Depending on your down payment and term, FHA’s monthly MIP may last for the entire life of the loan. That can make FHA more expensive long-term, even when the monthly payment looks attractive up front.
USDA and VA: Different Names, Same Idea
USDA Guaranteed and VA loans don’t use the word “mortgage insurance” as prominently, but they still have fees that serve a similar purpose:
- VA loans usually have a funding fee (which can be waived for some disabled vets).
- USDA Guaranteed loans typically have a guarantee fee and a modest annual fee built into the payment.
Those fees help protect the agencies that are backing the loans when borrowers default. They’re not bad or sneaky—but you should understand that you’re paying them to make the loan possible, not to insure you.
Putting the Mortgage Types Together
The question isn’t, “What’s the best mortgage type?” It’s, “What’s the best fit for my budget, my location, my timeframe, and my long-term plans?”
For one buyer, that might be a conventional loan with 5% down and PMI that drops off in a few years. For another, it might be FHA because of recent credit bumps. For a veteran, VA often wins by a mile. For someone willing to live just outside town, USDA Guaranteed might offer 0% down with a manageable payment.
Once again, your choice of lender is crucial. A good loan officer will:
- Lay out the programs you actually qualify for,
- Show you the monthly payment and total cost over the life of each option, and
- Talk honestly about how property condition and location affect which mortgage types will work.
Not every buyer will end up with a complicated decision. Many people will simply land on a straightforward conventional loan. But you should know what else is possible before you sign.
Looking Ahead to Step 7
If you missed the earlier parts of this series, I strongly recommend going back—especially to Step 2 on budgeting. Your budget determines what loans work for you. The more you know about your finances and your options, the easier it is to make a good choice.
In the next step, we’ll finally do what most people think is Step 1: start opening doors and looking at houses that fit your budget, your loan type, and your long-term plans.
If you have questions about mortgage types, or you want to talk through how different loans might work in your specific situation, I’m always happy to help.
About Me — Doug Berry, MBA, REALTOR®
The Bow Tie Agent
I’m a REALTOR® with Better Homes & Gardens Senter, REALTORS® who focuses on helping buyers understand the real-world side of homeownership — from lending and budgeting to navigating underwriting without surprises. With an MBA (Marketing concentration) and experience as a lender with USDA Rural Development’s mortgage programs, I approach the process the same way I do with clients: clearly, calmly, and without sales pressure.
If you have questions about this step, need help preparing for a home purchase, or have a topic you’d like me to cover in a future article, feel free to reach out:
