A residential mortgage is a loan specifically for purchasing a home where the property serves as collateral. Mortgages are available from various lenders, such as banks and credit unions, and have different types, including conventional, government-backed, and jumbo loans.
Types of residential mortgages
By interest rate:
- Fixed-rate mortgage: The interest rate remains the same for the entire life of the loan. This provides predictable monthly principal and interest payments.
- Adjustable-rate mortgage (ARM): The interest rate is fixed for an initial period and then adjusts periodically based on market indexes. The initial rate is often lower than a fixed-rate mortgage, but later payments can increase.
By loan type:
- Conventional loan: Not backed by a government agency. These loans typically require a good credit score and a down payment of at least 3% to 5%.
- Government-backed loans: Insured by federal agencies, offering more flexible qualifying requirements.
- FHA loan: Insured by the Federal Housing Administration, these loans allow for lower down payments (as low as 3.5%) and are available to buyers with lower credit scores.
- VA loan: Guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. VA loans may not require a down payment.
- USDA loan: Backed by the U.S. Department of Agriculture for rural and some suburban homebuyers, often with no down payment required.
- Jumbo loan: Exceeds the conventional loan limit for a property’s value. These are used for higher-priced homes and have stricter requirements for income and assets.