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Types of Mortgages & How They Work

Know your loan. Learn about your financing options for buying a home and shop around to get the best deal for you.

Types of Loans

Most people need to borrow money to buy a home. Depending on the kind of housing you are buying, there may be different types of loans available for you:

Different Kinds of Mortgages

The kind of mortgage that is right for you and that you qualify for depends on your situation. These are different kinds of mortgages:

  • Conventional Mortgages: No special requirements, such as having served in the military or living in a specific rural community You generally need:
    • A good credit history
    • Regular income
    • A debt-to-income ratio within the lender’s acceptable limits
    • A down payment, which may range from 3% to 20% depending on the lender and loan program
  • Jumbo Loans: mortgages above a certain dollar amount
  • Second Mortgage: Mortgages you take out in addition to the one you already have
  • Government-guaranteed loans Include:
    • Federal Housing Administration (FHA) loans
      • Visit and search for “FHA Lender List”
    • Department of Agriculture (USDA) loans
      • Visit and search for “grants and loans”
    • Department of Veterans Affairs (VA) loans
      • Visit and search for “home loans”
    • U.S. Department of Housing and Urban Development (HUD), Section 184 Indian Home Loan Guarantee Program loans
      • Visit and navigate to the page for Buying a Home

Other Assistance

State and local government agencies may offer other loan programs and assistance. Visit and navigate to the “State Info” section. Examples could include:

  • Down payment assistance or closing costs assistance
  • First time homebuyer programs
  • Programs to help people in specific professions get homes in the communities where they work
  • Also check what programs may be available through your state housing finance agency. Find your state housing finance agency at

How Mortgages Work

There are four factors to consider that affect the amount of your monthly mortgage payment:

  • Amount of the loan: The less money you borrow, the less money you have to pay back. This means a lower monthly payment.
  • Interest rate: The higher the interest rate, the more the loan costs. This means a higher monthly payment.
  • Kind of interest rate: Fixed-rate or adjustable rate. How this affects your monthly payment will depend. Often, initial monthly payments with adjustable rates will be lower than with fixed rates, but then they increase when the rate adjusts.
  • Term of the loan: The longer the term, the lower your monthly payment. But you will pay more interest because you will be paying for a longer period of time.

Getting Pre-Qualified or Pre-Approved

Pre-qualification is an informal way to get an estimate of how much money you can borrow. It is not an approval for a loan.
Pre-approval is a commitment from the lender to lend you money under some conditions they specify. It helps to get a pre-approval before you look for houses.

Shop Around for a Mortgage

Get Loan Estimates from several lenders. A Loan Estimate is a three-page form that you receive after applying for a mortgage. There is no fee for the Loan Estimate, but they may charge a credit report fee.

Our Online Pre-Qualification Form makes it easy, fast and secure to apply

For information on home lending programs, contact Meghan Wenker or Heather Rider at 701-774-4139. For a FREE “Money Guide to Home Buying” email or go to
American State Bank & Trust Co. NMLS# 407966