The most common type of mortgage used to buy a home in the United States is the conventional loan. But there are alternatives if a conventional loan — either conforming or jumbo — doesn’t fit your finances or situation. Read more to learn about these loan types, whom they’re designed for, and what it takes to get one.
Key Takeaways:
- Conventional loans are common but come with eligibility requirements that not all borrowers can meet.
- Borrowers eligible for loans backed by government agencies — FHA, VA, and USDA — can qualify for mortgages with more lenient financial requirements.
- Borrowers with unique circumstances may consider alternative loan types tailored to their needs, such as balloon mortgages or construction loans.
Federal Housing Administration Loans
Federal Housing Administration loans are issued by private lenders but regulated and insured by the federal government. FHA loans require a down payment of 3.5% and allow credit scores as low as 500. If you get an FHA loan, you must pay for mortgage insurance.
Conventional loans vs. FHA loans
FHA loans can be easier to get and less expensive for borrowers with a lower credit score and less money saved for a down payment. These loans are primarily for buyers whose finances may not qualify for a conventional loan. However, if you have good credit and can afford a down payment of at least 10% to 15%, FHA loans are more expensive than conventional loans.
Conventional Loans vs. FHA Loans
| Requirement | Conventional Loan | FHA Loan |
| Minimum credit score | 620 | 500 with 10% down; 580 with 3.5% down. |
| Minimum down payment | 5% for adjustable-rate loans or 3% for fixed-rate loans. | 3.5% |
| Mortgage insurance | Required if you’re putting less than 20% down. | Required for all loans. |
Veterans Affairs Loans
Veterans Affairs loans are available only to eligible military service members, veterans, and their surviving spouses. Issued by private mortgage lenders and insured by the government, VA loans require no down payment or mortgage insurance. However, you must pay a one-time guarantee fee at closing that helps fund the loan program.
Conventional loans vs. VA loans
VA loans are an option for current or former military personnel who haven’t saved up a large down payment or built sufficient credit. However, a VA loan can be more expensive than a conventional loan for borrowers with good credit and enough savings to make a down payment.
Conventional Loans vs. VA Loans
| Requirement | Conventional Loan | VA Loan |
| Minimum credit score | 620 | None. |
| Minimum down payment | 5% for adjustable-rate loans, or 3% for fixed-rate loans. | None. |
| Mortgage insurance | Required if you’re putting less than 20% down. | One-time VA funding fee instead of mortgage insurance. |
US Department of Agriculture Loans
U.S. Department of Agriculture loans are for low- and moderate-income borrowers buying a home in a rural area. A down payment is not required for USDA loans, which often are cheaper than FHA loans. However, you’ll have to pay for mortgage insurance and an upfront fee at closing.
Conventional loans vs. USDA loans
Unlike conventional loans, USDA loans can be used only to buy rural properties. There also are limits on your income and the size and type of the property. However, low-income buyers who want a rural home may qualify for a USDA loan when a conventional loan is out of reach.
Conventional Loans vs. USDA Loans
| Requirement | Conventional Loan | USDA Loan |
| Minimum credit score | 620 | None, but a score of 640 or higher is preferred. |
| Minimum down payment | 5% for adjustable-rate loans, or 3% for fixed-rate loans. | None. |
| Mortgage insurance | Required if you’re putting less than 20% down. | Upfront and annual guarantee fees instead of mortgage insurance. |
Other Alternatives to Conventional Loans
Beyond conventional and government-backed loans, other types of mortgage options are available for borrowers with specific needs and circumstances.
Interest-only loans
As the name suggests, the monthly payment on an Interest-only loan covers only the interest, typically for five to 10 years. After that, the monthly payment will increase to include interest and principal. The increase often is a big one because you’ll be repaying the principal balance over a shorter period. Interest-only loans can make sense if you expect to earn a lot more money by the time you start paying down the principal.
Balloon loans
Payments on a balloon loan are designed to repay only a portion of the principal, with a large final payment required to pay off the loan. This reduces the monthly payment for most of the repayment term, but you will need to make sure you can afford the large final payment. If you can’t afford that final payment, you’ll need to refinance, sell the house, or risk foreclosure.
Construction loans
If you plan to build a home, you need a construction loan. Keep in mind that construction loans cover only the cost of building the house. Once it’s finished, you’ll need to take out a separate mortgage to buy the home. Construction loans typically come with higher interest rates and shorter loan terms — usually one year.
Renovation and rehabilitation loans
A renovation or rehabilitation loan could make sense if you’re looking to buy a fixer-upper. Unlike construction loans, these types of loans cover both the cost of renovation and the cost of buying the home. The FHA offers 203(k) rehabilitation loans that combine the cost of both the mortgage and the renovations into a single monthly payment. These loans come with looser eligibility requirements but also have limits and restrictions.
For example, renovations must be performed by a licensed contractor.
Manufactured home loans
Lenders typically don’t consider manufactured and mobile homes permanent property because they are prebuilt in a separate location from where the owner will live. However, Fannie Mae, Freddie Mac, the FHA, and the VA offer manufactured home loans, though specific eligibility and property requirements will depend on the lender.
Reverse mortgages
Reverse mortgages allow older homeowners to tap into the equity they’ve built. Instead of making monthly payments, the borrower receives a payout as a lump sum, a series of payments, or both. The downside is you lose equity and the loan balance grows. Interest and fees also will increase the total amount you owe over time. Reverse mortgages must be paid when the borrower no longer lives in the home — typically done by selling the house.
Piggyback loans
A piggyback loan is a second mortgage, often in the form of a home equity loan or home equity line of credit. It is designed to help homebuyers with a low down payment borrow additional money to avoid private mortgage insurance.
For example, let’s say you only have enough money saved to make a 10% down payment. However, if you take out a piggyback loan for 10%, your primary loan has a loan-to-value ratio of 80%, which means you don’t have to pay for PMI.
The downside is that piggyback loans carry higher interest rates and must be repaid in addition to your primary mortgage.
Portfolio loans
Portfolio loans are a way for borrowers with nontraditional incomes or credit histories to get a mortgage if they are having trouble qualifying for another type of loan. Conforming conventional mortgages are typically sold by lenders to investors on the secondary mortgage market. Portfolio lenders keep these loans on their books, which allows them to set more lenient eligibility requirements. The downside is that portfolio loans can come with higher interest rates and fees.
Physician loans
Physician loans are offered exclusively to medical professionals, allowing them to take out a mortgage without a down payment or PMI. Doctors are often at a disadvantage when they try to take out a mortgage after medical school, as they have a high amount of student loan debt and a limited employment history. Physician loans have looser eligibility requirements, considering that the doctor’s earning potential will make them less likely to default on their mortgage.
Non-qualifying loans
Non-qualifying loans come with different eligibility requirements and are geared toward homebuyers with unique financial situations. Non-qualifying loans can help you get a mortgage if you have a lot of debt or poor or no credit, or your income is difficult to document. The downside is that non-qualifying loans also have higher interest rates and fees.
Seller financing
Seller financing — also known as owner financing — is an arrangement that allows you to cut out the lender altogether. Instead of taking out a loan from a bank or other financial institution, the buyer makes payments directly to the seller, and the seller becomes the lender. This allows the buyer to own a home if they can’t qualify for a mortgage. However, seller financing also can offer fewer legal protections for buyers.
FAQ: Alternatives to Conventional Loans
Here are answers to some frequently asked questions about conventional loan alternatives.
Conventional loans can be conforming or nonconforming. Conforming loans have maximum loan amounts and other requirements set by Fannie Mae and Freddie Mac, which back conforming loans. Nonconforming loans — often known as jumbo loans — do not need to meet these requirements. That makes them more flexible, though the trade-off usually is stricter requirements.
FHA loans allow for lower credit scores than conventional loans, which makes them cheaper for borrowers with poor credit. Conventional loans can cost less than FHA loans if you have good credit and a sizable down payment.
This depends on which loans you qualify for and your financial situation. FHA loans can be easier to qualify for because they allow for a lower credit score and a smaller down payment. VA loans and USDA loans also can be easier to get than conventional loans, but only certain types of borrowers are eligible.
The Bottom Line on Alternatives to Conventional Loans
Conventional loans can be a great mortgage choice — if you meet the eligibility requirements. However, conventional loans aren’t your only option. Other alternatives to conventional loans may better fit your needs and financial situation. Understanding the different types of home loans can help you qualify for a mortgage sooner or save money on your mortgage.
