Types of Mortgage Loans Available in California: A Borrower’s Guide

You have a lot of options when it comes to choosing a home loan in California. First-time buyers, in particular, often feel overwhelmed by the many different options available these days.

In this guide, we’ll explore the different types of mortgage loans available to home buyers and homeowners in California, and the pros and cons for each one.

The Main Types of Mortgage Loans in California

Let’s start with the good news. Choosing a type of home loan can be boiled down to two overriding decisions:

1. Do you want a conventional mortgage loan, or one that is backed by the government (like FHA and VA)?
2. Do you prefer a fixed mortgage rate that stays the same over the long term, or an adjustable rate that might save you money in the short term?

Okay, so there’s a little more to it than that. But once you answer these two questions, you’ll have a much easier time choosing the right type of home loan. So let’s explore them.

Option 1: Conventional vs. FHA and VA

For starters, you’ll need to choose between a conventional or government-backed home loan. Government-backed programs mainly include FHA and VA loans, and to a lesser extent the USDA program. Conventional financing, on the other hand, does not involve the government.

Conventional Home Loans

This is a standard or “regular” home loan. It is not insured or guaranteed by the federal government. Conventional mortgage loans can either have a fixed or adjustable interest rate, as explained below.

If you use a conventional loan to buy a house in California and put down at least 20%, you can avoid the extra cost of mortgage insurance. But there are lower down payment options as well, sometimes as low as 3%.

Conventional loans can be a good option for borrowers with strong credit profiles, as well as those with sufficient funds for a larger down payment.

Read more: Conventional mortgage financing explained

FHA Home Loans

An FHA loan is originated by a lender in the private sector, just like the conventional home loan option mentioned above. But the difference here is that the mortgage is insured by the government, via the Federal Housing Administration (FHA).

Borrowers who choose this type of home loan can put down as little as 3.5% of the purchase price or appraised property value. FHA loans can also be more flexible when it comes to credit scores, due to the government insurance backing.

This type of mortgage loan is popular with California home buyers who have limited funds for a down payment and/or lower credit scores.

Read more: FHA loan requirements in California

VA Home Loans

This is another type of government-backed home loan, and it’s available to most California military members and veterans.

The U.S. Department of Veterans Affairs (VA) provides mortgage lenders with a guarantee, similar to the FHA’s insurance backing mentioned above. This gives lenders additional protection against borrower default, or failure to pay.

VA loans are arguably the best type of mortgage loan for California servicemembers and veterans, because it allows you to buy a house with no down payment. With this program, home buyers can finance the entire purchase price while also avoiding mortgage insurance.

Read more: VA loan guidelines and requirements

Option 2: Fixed vs. Adjustable-Rate Mortgages

You have another set of options when choosing a type of home loan in California, and it pertains to the mortgage rate. You can choose to have a fixed or adjustable interest rate. And there are pros and cons on both sides. Here’s what you need to know:

Fixed-Rate Mortgage (FRM)

As its name suggests, a fixed-rate mortgage loan has the same interest rate for its full term or “life.” Even if you keep the loan for 10, 15, or even 30 years, the rate remains fixed and will not change.

Most home buyers in California and elsewhere in the U.S. use fixed-rate mortgages. It’s the most popular financing option. A smaller percentage of borrowers use adjustable ARM loans, which are covered below.

The downside is that you might pay a slightly higher rate in exchange for this long-term payment stability. With all other things being equal, fixed home loans tend to have higher interest rates when compared to adjustable mortgages.

But for many borrowers, this kind of trade-off is worth it. The 30-year fixed-rate mortgage is by far the most popular type of home loan in California, because it eliminates surprises and therefore helps with long-term budgeting.

Read more: How a fixed-rate mortgage works

Adjustable-Rate Mortgage (ARM)

This type of mortgage loan has an interest rate that can adjust or change over time. The rate can rise or fall depending on market conditions, and is usually associated with a certain “index” like the London Interbank Offered Rate (LIBOR).

These days, most adjustable-rate mortgage loans are “hybrids.” They get this name because they start off with a fixed rate of interest for a certain period of time, after which the rate begins to adjust.

This type of mortgage loan is popular with California home buyers who want to save money during the first few years of homeownership. The initial rate on an ARM loan is usually lower than the rate assigned to a standard fixed mortgage loan. This creates an opportunity for savings during those first few years.

Many borrowers who use adjustable-rate mortgages plan to either refinance or sell their homes before the initial fixed-rate phase has passed, avoiding the uncertainty of the adjustment phase. This is a common strategy for ARMs.

Read more: Fixed vs. adjustable loans

Specialty Home Loans for Unique Borrowers

In addition to the common types of mortgage loans explained above, California home buyers with unique financial situations might opt for a specialty loan product. These products cater to specific types of borrowers, including real estate investors.

Here are some specialized types of mortgage loans available in California:

• Bridge Loan: Short-term loan used to bridge the gap between selling one property and purchasing another. Often secured by the equity in the property being sold. Ideal for homeowners who need to purchase a new home before selling their current one.
• Construction Loan: Used to finance the building of a home. Converts to a permanent mortgage upon completion.
• DSCR: (Stands for debt service coverage ratio.) This type of loan relies on the rental income of a property to qualify, rather than the borrower’s personal income. Ideal for investors with multiple rental properties.
• FHA 203(k): Combines mortgage financing with renovation costs for properties in need of repair.
• Hard Money: Short-term loan secured by the property itself, often used for quick property renovations or purchases (a.k.a., “fix and flip”). High-interest rates but fast approval. Best for experienced investors with a clear exit strategy.
• Jumbo Loan: For high-value properties exceeding conforming loan limits. Requires strong credit and income, and possibly a larger down payment.
• Private Money: Similar to hard money loans but typically come from individual investors or small groups. Terms can be more flexible but they’re harder to find.
• Reverse Mortgage: Allows homeowners aged 62+ to convert home equity into cash without making monthly payments.

We Can Help You Choose

As you can see, you have a lot of different choices when choosing a type of mortgage in California. Even with the more “mainstream” home loan products, you’ll find options on top of options.

The good news is you don’t have to make this choice on your own. We can help you choose the best mortgage product or program based on your current financial situation and your long-term goals.

Bridgepoint Funding offers nearly all of the mortgage types listed above and serves the entire state of California. Please contact us if you have questions or would like to apply for a loan!