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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

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  • VA Loans
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CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. Comparing Types of Mortgages

MORTGAGE

Comparing Types of Mortgages

What you'll learn:What type of mortgage is best for you

EXPECTED READ TIME:7 MINUTES

Updated January 27, 2023

One of the things that can make the home buying process complicated is the dozens of mortgage options. It may seem like there are too many types and there is no one-size-fits-all loan. Different loan programs fit different borrower’s various needs. We’ll discuss the most common home loans and outline who they may be best suited for.

What are the different types of mortgages?

There are two main categories of mortgages:

  • Conventional
  • Government

Conventional loans are either conforming or non-conforming loans. The difference between the two types is the amount you can borrow. For 2023, most of the continental U.S. has a conforming limit of $726,200 for one-unit properties. In high-cost areas, that limit is increased to $1,089,300. Anything over those limits would be considered a non-conforming loan — also known as a jumbo loan.

A conventional mortgage is not guaranteed by a government entity like the Veterans Administration (VA) or the Federal Housing Administration (FHA). A conventional mortgage is available through private lenders like PenFed and may be sold to a government-sponsored enterprise such as Fannie Mae or Freddie Mac.

Government guaranteed loans include VA and FHA loans. Both the VA and FHA work hard to provide borrowers with low down payment options so that individuals and families can fulfill their dreams of homeownership.

Like conventional home loans, government loans have their own rules. Here is some useful information that illustrates some of the differences between conventional loans and government loans:

Conventional Loans: Conforming

  • Eligible Borrowers: U.S. citizens and permanent resident aliens
  • One-Unit Loan Limit: 2023 conforming amounts are $726,200 or $1,089,300 (in high-cost areas)
  • Number of Units: 1-4
  • Minimum Down Payment: 3-5%
  • Minimum Credit Score: 620 or 700+ for better rates
  • Best For: Good credit and larger down payments of 20% or more
  • Occupancy: Primary, second home, investment property
  • Pros: 20% down payment and no *private mortgage insurance (PMI)
  • Cons: Stricter credit

Conventional Loans: Jumbo

  • Eligible Borrowers: U.S. citizens and permanent resident aliens
  • One-Unit Loan Limit: Up to $1,000,000 (super jumbo loans up to $5,000,000 and may vary by lender)
  • Number of Units: 1-4 (may vary by lender)
  • Minimum Down Payment: 20-25%
  • Minimum Credit Score: 700 (may vary by lender)
  • Best For: Loans over conforming amounts
  • Occupancy: Primary, second home
  • Pros: Higher loan limits
  • Cons: Stricter guidelines

Government Loans: VA

  • Eligible Borrowers: Veterans, service members, and surviving spouses
  • One-Unit Loan Limit: No limits (may vary based on available entitlement and lender guidelines, must qualify for VA loans)
  • Number of Units: 1-4 (must live in one unit as the primary residence)
  • Minimum Down Payment: 0%
  • Minimum Credit Score: 580-620 (may vary by lender)
  • Best For: Veterans and service members for their primary residence
  • Occupancy: Primary, possible refinance on a second home, rental
  • Pros: Zero to low down and typically lower rates
  • Cons: Only available to veterans, service members, or their surviving spouses

Government Loans: FHA

  • Eligible Borrowers: U.S. citizens and permanent resident aliens
  • One-Unit Loan Limit: 2023 FHA loan limits are $472,030 or $1,089,300 (in high-cost areas)
  • Number of Units: 1-4 (must live in one unit as the primary residence)
  • Minimum Down Payment: 3-5%
  • Minimum Credit Score: 580 (requires higher down payment)
  • Best For: Low credit scores and for primary residences
  • Occupancy Primary
  • Pros: Low down, lower credit scores
  • Cons: *Mortgage insurance premium (MIP) for the life of the loan if less than 10% down and MIP for 11 years if 10% or more down

*Private mortgage insurance (PMI) is insurance that insures the lender in case of default. It's different from homeowners' insurance. PMI is required on conventional loans with less than a 20% down payment. PMI can add $100-200 — or more — to your mortgage payment each month. The good news is that once you have 20% equity in your home, you can ask the lender to remove the PMI.

*Mortgage insurance premium (MIP) is required with FHA loans for all loans regardless of the down payment. The MIP remains for the life of the loan and can add $100-200 — or more —each month to your payment. So, when comparing conventional and FHA loans, make sure you consider the additional mortgage insurance. Even though FHA rates might be lower, the MIP can make the payment higher.

From looking at the chart above, you'll be able to see what type of home loan might be best for your circumstances.

What kind of mortgage is best for me?

Veteran: Unless you're looking at purchasing an investment property, VA loans might be a good option. When you start considering finance options, look at VA mortgages first.

Low Credit Score: The FHA offers mortgages to borrowers with credit scores of 580 or lower with a higher down payment. Plus, you won't have the extra expense of MIP.

Small Down Payment: VA loans have the lowest. Qualifying veterans can get into a home with no money down. If your credit is good, you can also consider a conventional loan that only requires between 3-5% down. Another advantage with a conventional mortgage is that you can have the PMI removed once you have 20% equity in the home.

Investment Property: You'll probably need a conventional loan. The government aims to help borrowers get into a home to live in, not build their investment portfolio. Reference the above chart for the number of acceptable units.

More Than One Unit: You'll most likely have to go the route of a conventional loan, unless you're going to live in one of the units as your primary residence. In that case, you may be able to do a VA (if you're a veteran), FHA, or conventional loan.

More About Conventional Loans

Requirements for conventional home loans can vary from lender to lender, but most want a credit score of 620. With a much higher score of 700 or more, your interest rate should be better.

Traditionally, conventional loans require 20% down. But that is changing. Now some loans require as little as 3-5% down. With the low down payment requirement, you'll also have PMI that will increase your payment. An advantage of a conventional loan over an FHA is that once you have 20% equity in your home, you can request to have the PMI removed.

Credit score requirements and interest rates can vary between conforming loans (under $726,200) and non-conforming (over $726,200 or $1,089,300 for high-cost areas). Non-conforming jumbo loans require a larger down payment, have stricter credit requirements, and may also have higher interest rates.

More About Conventional Jumbo Loans

A jumbo loan is a non-conforming mortgage because it exceeds the conforming loan limit. For 2023, that limit in most of the U.S. is $726,200 or $1,089,300 for high-cost areas. Jumbo loans can be harder to get because there is more risk for the lender. Also, because a jumbo loan exceeds the Federal Housing Finance Agency (FHFA), it cannot be purchased by either Freddie Mac or Fannie Mae. Instead, private investors buy these loans.

Jumbo loans are mainly for larger homes and vacation properties. If your credit is less than stellar and you don't have a large down payment, you may not qualify for a conventional jumbo loan.

More About Government Home Loans

Loans backed by government entities such as VA and FHA are meant to assist low to middle-income families achieve their dream of buying a home. Let's take a more in-depth look at VA and FHA mortgages.

What is a VA loan?

The Veterans Administration guarantees VA loans. They offer highly competitive interest rates and there is little to no down payment required.

There are some great benefits to a VA loan if you qualify. You can typically purchase a home with less money out-of-pocket with the down payment being zero or very low. You will need to obtain your Certificate of Eligibility (COE) to get started.

Primary residences, second homes, and investment properties are eligible for an Interest Rate Reduction Refinance Loan (IRRRL). VA-guaranteed loans for second homes and investment properties are only eligible as IRRRL transactions. The borrower will need to certify that they previously occupied the property as their primary residence.

What is an FHA loan?

An FHA loan is issued by an approved lender and backed by the Federal Housing Administration (FHA). Since this is another type of government-backed loan, like a VA loan, there is typically a smaller down payment required. These mortgages are meant for low to middle-income families to assist in their home purchase.

There are lending limits for FHA home loans. For 2023, it is $726,200. In high-cost areas like California, New York, and Hawaii, that limit may be up to $1,089,300. The FHA has a map that shows the county lending limits. Also, credit score requirements are less strict than with conventional loans.

What is a fixed-rate mortgage?

With a fixed-rate mortgage, the interest rate stays the same over the loan's life (or term). Let's say you have a 30-year fixed loan. That means your interest rate is locked in and will not change for the full 30-year period.

Fixed-rate mortgages are best suited for someone who likes security. With a fixed rate, their interest rate can never increase. If mortgage rates are historically low — as they are in 2020 — then a fixed-rate mortgage is a smart financial decision.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) is also called a variable rate. Unlike a fixed rate, the interest rate changes after the introductory period of 3-10 years.

ARMs can be appealing to borrowers when the introductory rate is lower than the current fixed rates. That's especially the case with jumbo loans. But when overall rates are extremely low, ARM rates may be higher. It depends on the market.

Consider Terms for Mortgages

The term (length) of your mortgage loan is how long you will have to pay it off. The most common terms for fixed-rate loans are 15-, 20-, and 30-years. The term for ARMs is typically 30 years with the initial term before rate adjustment being either 3-, 5-, 7-, or 10-years.

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

VA Loan Compared to a Conventional Loan

Discover what the difference between a VA loan and a conventional loan is. Answer the question of if a VA loan is better than a conventional loan.
couple researching va and conventional loans

What Are the Different Types of Mortgages?

There are different types of mortgages for all financial situations. PenFed Credit Union provides details on different mortgages and which might be right for you.
couple researching on laptop together

What Is a Jumbo Loan?

What is a jumbo loan and why would I need one? PenFed Credit Union explains everything you need to know about jumbo loans and how to get one.
single-family houses in a row in a neighborhood

What Is a Conforming Loan?

A conforming loan is based on guidelines set by government sponsored entities. It is important to understand what a conforming loan is and its differences from other mortgage loans.
people discussing over mortgage papers
image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


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IMPORTANT NOTICE

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The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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