Conventional, FHA, and VA loans are similar in that they are all issued by banks and other approved lenders, but some major differences exist between these types of loans. Read on to learn more about the different characteristics of conventional, FHA, and VA loans as of 2017, and find out which one might be right for you.
When you apply for a home loan, you can apply for a government-backed loan—like a FHA or VA loan—or a conventional loan, which is not insured or guaranteed by the federal government. This means that, unlike federally insured loans, conventional loans carry no guarantees for the lender if you fail to repay the loan. (If you’re shopping for a home loan, learn what you need to know about mortgages.)
For this reason, if you make less than a 20% down payment on the property, you’ll have to pay for private mortgage insurance (PMI) when you get a conventional loan. If you default on the loan, the mortgage insurance company makes sure the lender is paid in full.
Conventional mortgages fall into one of two categories: conforming and nonconforming loans. Conventional conforming mortgage loans must adhere to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and are available to everyone, but they're more difficult to qualify for than VA and FHA loans. Because there is no government insurance, conventional loans pose a higher risk for lenders so credit and income requirements are stricter than for FHA and VA mortgages.
Generally, you can get a conventional conforming loan if you:
Other types of conventional loans—that are not conforming—include jumbo loans, portfolio loans, and subprime loans.
A FHA loan is a loan insured by the Federal Housing Administration (FHA). If you default on the loan and your house isn't worth enough to fully repay the debt through a foreclosure sale, the FHA will compensate the lender for the loss. (Read about different loss mitigation options for borrowers with FHA loans.)
Because the loan is insured, the lender can offer you good terms including a low down payment—as low as 3.5% of the purchase price. This type of loan is often easier to qualify for than a conventional mortgage and anyone can apply. Borrowers with a FICO credit score as low as around 500 might be eligible for a FHA loan. However, FHA loans have a maximum loan limit that varies depending on the average cost of housing in a given region. To learn more about FHA loan limits, visit the U.S. Department of Housing and Urban Development (HUD) website.
Most FHA loans get approved by an automated system while a few are referred to the lenders, who manually review borrowers' applications based on FHA guidelines. In 2016, HUD eliminated a rule that required manual reviews for all mortgage applications from borrowers with credit scores under 620 and debt-to-income ratios above 43%. As of March 2019, however, the agency informed lenders that it's tightening the underwriting requirements for FHA-insured loans because too many risky loans are being made. Now, around 40,000-50,000 loans per year—four to five percent of the total mortgages that the FHA insures on an annual basis—which would have previously been approved automatically will now be put through a more rigorous manual underwriting review, according to FHA officials.
Also, you’ll have to pay a mortgage insurance premium or "MIP" as part of an FHA loan. (Conventional mortgages have PMI and FHA loans have MIP.) The premiums that borrowers pay contribute to the Mutual Mortgage Insurance Fund. FHA draws from this fund to pay lenders' claims when borrowers default.
A VA loan is a loan guaranteed by the Veterans Administration (VA). This type of loan is only available to certain borrowers through VA-approved lenders. The guarantee means that the lender is protected against loss if the borrower fails to repay the loan.
To get a VA loan, you must be:
VA mortgage loans can be guaranteed with no money down and there is no private mortgage insurance requirement. Borrowers do, however, usually have to pay a funding fee—a one-time charge between 1.25% and 3.3% of the loan amount. (To learn more about VA loans, see Veterans Home Loan Guaranty Program.)
Picking the right mortgage for your situation can be daunting. If you’re having trouble figuring what type of loan is best for your circumstances or need other home-buying advice, consider contacting a HUD-approved housing counselor, a mortgage lender, or a real estate attorney.