What is the Difference Between a VA, FHA, and Conventional Home Loan?
As you shop for a loan, you may notice you have many options. Conventional loans are the most commonly known, but there are plenty of government-backed loans too. Understanding your options can help you make the right choice.
Government-Backed Loans
Let’s start with government-backed loans because they have the most flexibility. The VA and FHA loans are government-backed. The VA and FHA don’t underwrite or fund the loans. Instead, they guarantee the loans for the lenders that fund them.
VA loans are for veterans of the military as well as current military members with at least 90 days of service during wartime or 181 days of service during peacetime. VA loans have flexible guidelines including:
- 0% down payment
- No minimum credit score (most lenders want at least a 620)
- High total debt ratio allowance of 43%
- Stable income and employment
- Proof of VA loan eligibility with the Certificate of Eligibility
Veterans don’t have to pay mortgage insurance on a VA loan, even with no down payment. The only ‘extra’ fee charged by the VA is the funding fee, which you pay at the closing or can wrap into the loan. The average veteran pays 2.15% of the loan amount for the funding fee.
FHA loans are for anyone that qualifies – you don’t have to be a veteran or be in a specific income bracket. FHA loans make it easier for borrowers that don’t have a lot of money for the down payment or great credit to secure a home loan. FHA loans require:
- 3.5% down payment (the funds can be a documented gift from your family, employer, or a charitable organization)
- Minimum 580 credit score
- Maximum 31% housing ration and 41% total debt ratio
- Stable income and employment
- Proof that the home will be your primary residence
FHA borrowers do pay mortgage insurance for the life of the loan. The FHA charges upfront mortgage insurance equal to 1.75% of the base loan amount. They also charge 0.80% of the loan’s principal balance on an annual basis. You pay the premium on a monthly basis, though, so 1/12th of the premium each month.
Conventional Loans
Conventional loans aren’t backed by a government entity. Instead, Fannie Mae and Freddie Mac guarantee them.
Conventional lenders each have their own guidelines, but in general, expect:
- Minimum 5% down payment
- Minimum 680 credit score
- Maximum 28% housing ratio and 36% total debt ratio
- Stable income and employment
If you put less than 20% down on the home, conventional loans charge Private Mortgage Insurance. However, you only pay the insurance until your principal balance is less than 80% of the home’s value.
Compare your loan options carefully. Evaluate the interest rate, closing costs, and the long-term mortgage insurance you must pay. Looking for the loan that costs the least over the term rather than focusing on the monthly payment will give you the best option.