Find Out Which Mortgage Is Right for You: Comparing Conventional, FHA and VA Loans

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If you’re looking to finance a home, you may come across the topic of FHA vs. conventional loans vs. VA loans. These are popular choices for financing a house, and if you’re trying to find the best mortgage rates, it’s important to understand the difference between these loans. Each has its own set of requirements and eligibility criteria, which could affect how much you end up paying. By spending the time to find the best loan for your situation, you could end up saving yourself a ton of money on fees and interest paid over the life of your loan.

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What is a conventional loan? 

Conventional loans are not insured by any government entity. Instead, they are home loans extended to borrowers with no government backing. Since they’re not insured by the government, many lenders consider these loans to be higher risk. To mitigate that risk, lenders look for a documented stream of income and employment from things like tax returns, pay stubs, W2s and bank statements. Conventional loan providers typically require a strong credit history that shows a history of paying bills on time, and some lenders may also require an appraisal to determine the home’s worth.

You may have a more challenging time being approved for a conventional loan if you have any unusual employment circumstances, or cannot document your employment history. Prospective borrowers who are self-employed or own their own company may find that the write-offs they took at tax time could hurt their ability to qualify for a mortgage. That’s because many lenders deduct certain write offs when calculating your income in determining your ability to repay the loan.

[ Read: How to Calculate Your Mortgage ]

Lenders offering conventional loans typically offer low interest rates and a wide variety of loan programs, so you should be able to find a program that fits your needs. For instance, you might opt for a repayment term of 10, 15, 20 or 30 years. Alternatively, you may want to choose a fixed-rate mortgage over an adjustable-rate loan.

What is an FHA loan? 

If you don’t qualify for a conventional loan, an FHA loan can be a good alternative. FHA loans are insured by the government, and can be a bit easier to qualify for. For starters, credit scores can be as low as 580 with the minimum 3.5% down payment, and with a 10% down payment you can go as low as a 500 credit score. Even though these requirements are quite flexible, FHA loan rates are still similar to conventional loans.

FHA loans do have mortgage insurance both as an added upfront and monthly cost to the loan. It’s designed to protect the lender in the event that you stop making payments. To get rid of the monthly mortgage insurance cost, you’ll usually have to wait until you pay down your loan to 78% of the value of your home, or refinance into a brand new loan.

FHA loans also require you to occupy the home as your principal place of residence, so financing vacation homes or rental properties is out of the question. And compared to conventional loans, FHA loans also tend to be much more strict when it comes to ensuring whether the condition of a home is acceptable as it pertains to health, safety, and habitability.

What is a VA loan? 

If you’re a member of the military, you may be eligible for a VA loan. VA loans are insured by the U.S. Department of Veterans Affairs, and offer a ton of flexibility because there is no minimum credit score, no minimum down payment and no mortgage insurance to worry about as an added cost to the loan. That said, there are some lenders who may not be as flexible and add requirements of their own, such as a minimum credit score.

VA loans have a one-time funding fee which are typically in the range of 1.4% and 3.6% of the loan amount. As always, you’ll want to compare VA loan rates with other loans to see what’s best for you. The amount of the fee is determined by several factors such as your loan amount, whether you’ve used your VA benefits in the past, and the type of loan you are getting. There are also circumstances in which the fee could be waived altogether, such as if you have a service-related disability.

[ Next: VA Funding Fees, Explained ]

Finally, VA loans also have strict requirements when it comes to a property’s condition. So homes in need of major repairs or renovations to fix health or habitability issues may not be eligible for financing.

Requirements and average qualifications

Loan Type Minimum Credit Score Best For Minimum Down Payment Average Fees
Conventional 620 (can vary by lender) Borrowers with good credit, and can document steady employment.  3% 2%–6% based on the loan Application fee Government feesThird-party costsTaxes
FHA 500 with a 10% down payment, otherwise 580 Borrowers looking to finance their primary home but have a low credit score.  3.5% 1.75% PMIOther third-party and lender fees may apply
VA None  Members of the military who want no down payment on a primary home, or have a low credit score None 1.4%–3.6% of the loan amount. Other third-party and lender fees may apply

Which type of home loan should you get?

Conventional loans can be more difficult to qualify for, but if you’re able to demonstrate a steady employment and credit history, you will have a lot of options to finance primary, vacation, and rental homes. You should also find low interest rates and a wider variety of loan types and terms to fit your situation.

If you’re having trouble financing your primary home because of bad credit or are a first-time home buyer, FHA loans are worth a look. It’s also a good option if you’re strapped for cash, because the minimum down payment can be as low as 3.5%.

[ More: VA Loans vs. Conventional Loans ]

Members of the military looking to finance a primary home should look into VA loans as they offer a ton of flexibility. VA loans have no minimum down payment or credit score requirement. However, there are strict requirements as to the condition of the property though, so homes requiring any large amount of repairs may not be eligible.



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