Lenders talk about loans as if there were dozens of them, but every mortgage is really built from three decisions. According to the Consumer Financial Protection Bureau, a loan has a loan type, a loan term and an interest rate type. Once you see those three dials separately, the offers you get from lenders become much easier to compare.
This guide walks through each dial in the order most first-time buyers meet them. It sits between working out How Much House Can I Afford? A Budget That Starts With the Monthly Payment and Getting Pre-Approved for a Mortgage: What It Means and How to Do It Well, because the loan type you aim for shapes both your down payment and the letter a lender gives you.
Dial one: the loan type
Loan types fall into three groups: conventional loans, government-backed loans and special programs. The type affects how much you need for a down payment, what the loan costs in total once interest and mortgage insurance are counted, and how much you can borrow.
| Loan type | Who it is built for | Down payment | Mortgage insurance |
|---|---|---|---|
| Conventional | Most borrowers; not part of a government program | Varies by lender and program | Typically needed when you put down less than 20% |
| FHA | Buyers with lower credit scores or small savings | As low as 3.5% | Required on every FHA loan |
| VA | Eligible veterans, servicemembers and surviving spouses | Low or even zero | No monthly premium, but usually an upfront fee at closing |
| USDA | Low- and moderate-income buyers in rural areas | Zero | Upfront fee plus ongoing premiums |
Conventional loans
“Conventional” simply means the loan is not part of a specific government program, and most mortgages are conventional. The CFPB notes that they typically cost less than FHA loans but can be harder to qualify for. Most are “conforming” loans, which follow a maximum loan amount set by the government and rules set by Fannie Mae and Freddie Mac. Loans above that limit, often called jumbo loans, have rules that vary by lender and usually call for good credit and a larger down payment.
FHA loans
FHA loans are made by private lenders and insured by the Federal Housing Administration, which does not lend the money itself. They allow down payments as low as 3.5 percent and lower credit scores than most conventional loans, and the maximum loan amount depends on your county. Mortgage insurance is required on every FHA loan.
Which is cheaper is not fixed. For a borrower with good credit and a medium down payment of 10 to 15 percent, the CFPB says FHA loans tend to cost more than conventional ones. For a borrower with a lower score or a smaller down payment, FHA can often be the cheapest choice. The practical answer is to ask lenders to quote you both and compare the total cost.
VA and USDA loans
VA loans are for eligible veterans, current servicemembers and surviving spouses. Private lenders make them and the Department of Veterans Affairs guarantees them. There is no monthly mortgage insurance, though there is usually an upfront fee at closing, and the down payment can be low or even zero. USDA loans serve low- and moderate-income borrowers in rural areas, offer zero down payment and are usually cheaper than FHA loans, with an upfront fee and ongoing mortgage insurance premiums.
Tip: Ask your state housing finance agency and a HUD-approved housing counselor about local programs. Many offer down payment assistance that can be used with an ordinary FHA or conventional loan, and some are aimed at first-time buyers, teachers or firefighters.
Dial two: the loan term
The term is how long you have to repay. Thirty and fifteen years are the most common. A shorter term means higher monthly payments, but usually a lower interest rate and a lower total cost, because you borrow for less time. The CFPB notes that the rate on a shorter term is usually lower, sometimes by as much as a full percentage point.
For many first-time buyers the 30-year payment is what makes the budget work. That is a reasonable choice. If you want to pay the loan down faster later, ask each lender whether there is any penalty for extra payments.
Dial three: fixed or adjustable rate
With a fixed rate, your interest rate and your principal and interest payment stay the same for the life of the loan. Your total payment can still move if your property taxes, homeowner’s insurance or mortgage insurance change. Most borrowers choose fixed-rate loans.
An adjustable-rate mortgage, or ARM, usually starts with a fixed introductory period. After that, the rate moves up and down with the market, and the CFPB warns the principal and interest payment could rise a lot, even double. Some ARMs have caps that limit each change. An ARM can make sense if you are confident you will move before the fixed period ends; if you end up staying longer, it can cost much more.
Features to question before you sign
Lenders generally have to check your income, assets, debts and credit history to make sure you can repay. Beyond that, look for features that could surprise you later:
- Prepayment penalty: a charge for paying the loan off early.
- Balloon payment: a large lump sum due at a set point.
- Negative amortization: a balance that grows even while you pay.
- Interest-only payments: payments that do not reduce what you owe.
If a quote includes any of these, ask the loan officer why, and ask for a second Loan Estimate for the same loan without that feature. Seeing the two side by side shows you exactly what the safer version costs.
Putting the three dials together
Write down the combinations that fit your situation, such as a 30-year fixed conventional loan with 10 percent down and a 30-year fixed FHA loan with 3.5 percent down. Request quotes for each from at least two or three lenders on the same day, because rates change daily. The official Loan Estimate uses the same form at every lender, so the comparison is fair. Our guide to Closing Costs Explained for First-Time Buyers shows which lines on that form to compare first.