Complete Guide to FHA, VA, and Conventional Loans

FHA Loans (Federal Housing Administration)

FHA loans are government-backed mortgages designed for first-time homebuyers and those with lower credit scores or limited down payment funds. These loans are insured by the FHA, allowing lenders to offer more favorable terms to borrowers who might not qualify for conventional loans.

Key Features

• Minimum down payment as low as 3.5% for credit scores of 580+
• Accept credit scores as low as 500 (with 10% down payment)
• More lenient debt-to-income ratio requirements - DTI up to 43-50% may be acceptable
• Allow higher DTI ratios with compensating factors like strong credit or reserves
• Assumable loans - buyer can take over your mortgage (rare benefit)

Requirements

• Upfront mortgage insurance premium (MIP): 1.75% of loan amount (can be rolled into loan)
• Annual mortgage insurance: 0.45-1.05% of loan amount (paid monthly)
• Property must meet FHA appraisal standards (stricter than conventional)
• Loan limits vary by county: $498,257 to $1,149,825 in high-cost areas (2024)
• Must be owner-occupied (can't use for investment properties)
• Debt-to-income ratio: Generally 43% max, up to 50% with strong compensating factors

Advantages

• Lower down payment requirements make homeownership accessible sooner
• Easier qualification with imperfect credit (580+ accepted)
• Competitive interest rates despite lower credit requirements
• Assumable loans can be a selling point in rising rate environments
• Gift funds allowed for entire down payment from family
• Seller can pay closing costs up to 6% of purchase price

Disadvantages

• Required mortgage insurance for life of loan (if down payment less than 10%)
• Upfront MIP fee adds $4,375 to a $250,000 loan
• Annual MIP adds $104-$219/month to a $250,000 loan
• Loan limits may be too low for expensive markets like San Francisco or NYC
• Stricter property condition requirements - home must meet minimum standards
• More paperwork than conventional loans

Cost Example: $250,000 FHA Loan

• Down payment (3.5%): $8,750
• Upfront MIP (1.75%): $4,375 (added to loan, so you borrow $254,375)
• Annual MIP (0.85%): ~$180/month
• Total monthly payment with MIP: ~$1,760 (vs. $1,580 without MIP)

Best For

• First-time homebuyers with limited savings (only 3.5% down needed)
• Borrowers with credit scores between 580-680
• Buyers in areas where FHA limits are sufficient for their home
• Those with higher DTI ratios that conventional loans won't accept
• Borrowers recovering from credit issues (2-3 years after bankruptcy/foreclosure)

VA Loans (Veterans Affairs)

VA loans are available to eligible veterans, active-duty service members, and surviving spouses. These government-backed loans offer exceptional benefits, including no down payment requirement and no private mortgage insurance - unmatched advantages in the mortgage industry.

Key Features

• 0% down payment option - buy a home with no money down
• No private mortgage insurance (PMI) required - ever
• Competitive interest rates - often lower than conventional
• Limited closing costs - seller can pay all closing costs
• No prepayment penalties - pay off early without fees
• Can be used multiple times - as long as entitlement is available

Eligibility Requirements

• Service requirements vary by era:
  • Wartime: 90+ days of active duty
  • Peacetime: 181+ days of active duty
  • National Guard/Reserves: 6+ years
  • Surviving spouses: Of service members who died in service or from service-connected disability
• Certificate of Eligibility (COE) from the VA (online application takes minutes)
• VA funding fee: 0.5-3.3% of loan amount (varies by down payment and first-time use)
• Waived for disabled veterans (10%+ VA disability rating)
• Property must meet VA minimum property requirements (MPRs)
• Must have sufficient income and credit to qualify with lender

VA Funding Fee

One-time fee that helps keep the program running (can be rolled into loan):

• First-time use, 0% down: 2.15% of loan ($5,375 on $250,000 loan)
• First-time use, 5% down: 1.5%
• First-time use, 10%+ down: 1.25%
• Subsequent use, 0% down: 3.3%
• Waived completely for veterans with 10%+ disability rating

Advantages

• No down payment needed - buy a $300,000 home with $0 down
• No monthly mortgage insurance - saves $100-300/month vs. conventional
• Easier qualification standards than conventional (no minimum credit score requirement)
• Can be used multiple times - sell and buy again with remaining entitlement
• Assumable by qualified buyers - huge advantage if rates rise
• VA appraisal protects you - ensures home meets minimum standards
• Limits on closing costs - can't charge veterans certain fees

Disadvantages

• Limited to eligible veterans and service members (obviously)
• VA funding fee required (though waived for disabled veterans)
• Property must meet VA standards - may limit options in older homes
• Some sellers prefer conventional buyers due to misconceptions about VA loans
• VA appraisal can kill deals if property doesn't meet MPRs

Cost Comparison: $250,000 VA Loan vs. Conventional

VA Loan (0% down):

• Down payment: $0
• VA funding fee: $5,375 (added to loan, so you borrow $255,375)
• No PMI: Saves ~$150/month
• Monthly payment: ~$1,612 (P&I only, no PMI)

Conventional Loan (5% down):

• Down payment: $12,500
• Loan amount: $237,500
• PMI: ~$150/month
• Monthly payment: ~$1,650 (P&I + PMI)

VA Advantage: Save $12,500 upfront AND $38/month, despite borrowing more!

Best For

• All eligible veterans and service members (it's almost always the best option)
• Especially those with limited down payment funds
• Veterans with disability ratings (funding fee waived = massive savings)
• First-time homebuyers who served
• Those with credit scores in the 620-680 range

Conventional Loans

Conventional loans are not backed by the government and typically require higher credit scores and larger down payments. However, they offer flexibility and can be advantageous for borrowers with strong financial profiles.

Key Features

• Minimum down payment of 3-5% for qualified borrowers
• PMI required if down payment less than 20% (but can be removed later)
• Higher loan limits than FHA: $766,550 for 2024 in most areas (higher in expensive markets)
• Conforming loans: Meet Fannie Mae/Freddie Mac standards
• Jumbo loans: Above conforming limits, stricter requirements

Requirements

• Credit score typically 620+ (but 740+ gets best rates)
• Debt-to-income ratio usually below 43% (some lenders allow up to 50%)
• Two years of stable employment history in same field
• Documented income and assets (pay stubs, W-2s, tax returns, bank statements)
• Cash reserves: 2-6 months of payments preferred

Advantages

• PMI can be removed once you reach 20% equity (unlike FHA's permanent MIP)
• Higher loan limits for expensive homes ($766,550+)
• More property types eligible: condos, investment properties, second homes
• Faster closing process than government loans (less red tape)
• No upfront mortgage insurance premium (unlike FHA)
• Lower overall costs for borrowers with 20% down and good credit

Disadvantages

• Stricter credit score requirements than FHA/VA
• Larger down payment needed for best terms (10-20%)
• Higher interest rates for borrowers with less than 20% down
• PMI required until 20% equity (though removable)
• More difficult to qualify with credit issues or high DTI

Conventional vs. FHA Comparison

Feature	Conventional	FHA
Min. Credit Score	620+	580+
Min. Down Payment	3-5%	3.5%
Mortgage Insurance	Removable at 20% equity	Permanent (unless 10% down)
Loan Limits	$766,550+	$498,257-$1,149,825
Best For	Good credit, 10-20% down	Lower credit, 3.5% down

Best For

• Borrowers with good to excellent credit (680+)
• Those with 10-20% down payment saved
• Buyers purchasing homes above FHA limits
• Borrowers who can quickly reach 20% equity (to remove PMI)
• Second home or investment property purchases

Which Loan Type Should You Choose?

Choose FHA if:

• Your credit score is 580-680
• You only have 3.5% saved for down payment
• Your DTI is 43-50% (too high for conventional)
• You're a first-time homebuyer with limited funds
• The home is within FHA loan limits

Choose VA if:

• You're an eligible veteran or active-duty service member
• You have little to no down payment saved
• You want to avoid PMI completely
• You have a VA disability rating (funding fee waived)
• Seriously, if you're eligible for VA, use it - it's almost always the best option!

Choose Conventional if:

• Your credit score is 680+
• You have 10-20% down payment
• You want the ability to remove PMI once you hit 20% equity
• You're buying above FHA loan limits
• You're buying a second home or investment property