Loan Types
Loan Types Explained by Coventry Enterprises of America
Loan Types
Every Major Loan Type
Not all loans are created equal. The type of loan you choose affects your interest rate, your monthly payment, your eligibility requirements, and your rights as a borrower. This guide from Coventry Enterprises of America covers every major loan category so you can compare them before you start shopping.
FHA Loans are insured by the Federal Housing Administration and designed for borrowers with lower credit scores or smaller down payments. The minimum down payment is 3.5 percent with a credit score of 580 or higher. All FHA loans require mortgage insurance premiums, both upfront and annually, which add to your total cost.
VA Loans are available to eligible veterans, active-duty service members, and surviving spouses. They require no down payment and no private mortgage insurance. VA loans typically have competitive interest rates and reasonable fee structures, though a funding fee applies in most cases.
USDA Loans are backed by the U.S. Department of Agriculture and designed for properties in eligible rural and suburban areas. They offer 100 percent financing, meaning no down payment, and competitive rates. Income limits apply.
Conventional mortgages are not backed by any government agency. They conform to standards set by Fannie Mae and Freddie Mac, which purchase them from lenders. Conforming loan limits adjust annually. Loans above those limits are called jumbo loans and typically carry stricter credit and income requirements along with slightly higher rates.
ARMs start with a fixed rate for an initial period, then adjust periodically. Common structures are 5/1, 7/1, and 10/1, meaning five, seven, or ten years of fixed rate followed by annual adjustments. Caps limit how much the rate can move in a single adjustment and over the life of the loan, but rate increases can still translate into significant payment increases. Understand the caps and the worst-case scenario before choosing an ARM.
DSCR Loans qualify based on the property's income rather than the borrower's personal income. Lenders calculate the Debt Service Coverage Ratio by dividing the property's net operating income by the annual debt service. A ratio above 1.0 means the property generates enough income to cover the loan payments. These loans are popular with real estate investors who have complex income structures.
Hard Money Loans are short-term, high-rate loans secured by real estate. They close quickly because lenders focus on the property value rather than the borrower's creditworthiness. Interest rates commonly run from 10 to 15 percent, and terms are typically 12 to 24 months. They are used for fix-and-flip projects and quick acquisitions where conventional financing is too slow.
Bridge Loans are short-term loans that bridge the gap between buying a new property and selling an old one. They are secured by the departing property and typically run six to twelve months. The cost is higher than a standard mortgage, and the borrower is on the hook for two payments if the old property does not sell quickly.
Construction Loans fund the building of a new home or major renovation. They are structured as short-term lines of credit that draw down as construction progresses. Once the project is complete, they convert to a permanent mortgage or require a refinance. Interest rates are variable and typically higher than permanent mortgages.
Commercial real estate loans follow different underwriting standards than residential loans. Lenders look at the property's cash flow, the borrower's business financials, and the loan-to-value ratio. Terms are shorter than residential mortgages, often 5 to 20 years, with balloon payments common. Commercial loans are less regulated than consumer loans, which means borrowers have fewer default protections.