What's the Difference Between a Conventional, FHA, and VA Loan?

If you're looking for a home mortgage, be sure to understand the difference between a conventional, FHA-insured, and VA-guaranteed loan.

By , Attorney

Conventional, FHA-insured, and VA-guaranteed mortgages are similar in that they're all issued by banks and other approved lenders. But these types of loans are different. Which type of loan you should get depends on your needs and circumstances.

  • Who should get an FHA loan. If you have a low credit score and a small down payment, you might want to consider an FHA-insured loan because other loans typically aren't available to those with bad credit.
  • Who should get a conventional loan. If you have good to excellent credit, you might benefit more from a cheaper conventional loan.
  • Who should get a VA loan. If you're a current or former military servicemember, you should investigate getting a VA-guaranteed loan, which might be the least expensive of all three loan types.

In this article, you'll learn what you need to know about conventional, FHA-insured, and VA-guaranteed loans as of 2022.

Summary of Conventional vs. FHA vs. VA Loans

Here's a summary of the difference between conventional, FHA, and VA loans, with more details below.

Conventional Home Loans

FHA-Insured Loans

VA-Guaranteed Loans

FICO credit score/history

Good credit required. Fannie Mae requires 620 or 640, and Freddie Mac requires 620 or 660, depending on the situation. Lenders may have stricter requirements.

Credit score as low as 500 might be eligible. To qualify for the lowest down payment, 580 or higher.

Lenders set requirements, not VA. Typically 620 or higher.

Maximum debt-to-income ratio

As a guideline, for conventional conforming loans, should not be greater than 33% to 36%. But up to 45% permitted in some cases.

Generally, 43%, but perhaps higher with compensating factors (like having a fair amount of residual income at the end of the month or lots of overtime income or reliable bonuses).

Generally, 41%.

Minimum down payment

Usually 5% of purchase price, but as little as 3%. However, if less than 20% down, will have to pay for private mortgage insurance (PMI).

Credit score of at least 580, then 3.5% of the purchase price. Credit score between 500 and 579, then 10%.

As low as 0% down. But a funding fee, a one-time charge between around 1.25% and 3.6% of the loan amount, is required.

Mortgage insurance

Again, if less than 20% down, must pay for PMI until you reach a loan-to-value ratio of 80%.

Mortgage insurance premium (MIP) required. Upfront MIP of 1.75% of the loan amount and monthly MIP amounts are usually required. (As of March 20, 2023, most borrowers pay an annual MIP of 0.55%.)

No PMI requirement.

Refinance options

Many options, conventional and other alternatives. Must qualify to refinance.

FHA offers refinance options, such as a streamline refinance. Or you could refinance into another type of loan. To refinance, you must qualify for either the FHA-insured loan or other loan type.

VA offers refinance options, like an interest rate reduction refinance loan (IRRRL). Or you could refinance into another type of loan. To refinance, you must qualify for either the VA-guaranteed loan or other loan type.

What Is a Conventional Home Loan?

When you apply for a home loan, you can try for a government-backed loan, like an FHA-insured or VA-guaranteed loan, or a conventional loan that the federal government doesn't insure or guarantee. Unlike federally insured loans, conventional loans carry no guarantees for the lender if you fail to repay the loan.

For this reason, if you make less than a 20% down payment on the property, you'll probably have to pay for private mortgage insurance (PMI) when you get a conventional loan. If you default on the loan, the mortgage insurance company ensures the lender is paid in full.

You can get a conventional loan to buy a home to live in, or for an investment property or a second home. Also, conventional mortgages fall into one of two categories: conforming or nonconforming loans.

Conventional Conforming Mortgage Loans (Fannie Mae and Freddie Mac Loans)

"Conventional conforming" mortgage loans adhere to guidelines that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) set. These loans are eligible for sale to Fannie Mae and Freddie Mac. They're subject to amount limitations.

Conventional conforming loans are available to everyone. But they're more difficult to qualify for than VA-guaranteed and FHA-insured loans. Because conventional loans don't have government insurance, these loans pose a higher risk for lenders.

So, credit and income requirements are stricter for conventional conforming mortgage loans than FHA-insured and VA-guaranteed mortgages.

Eligibility requirements for a conventional conforming loan. Generally, you can get a conventional conforming loan if you:

  • have good credit
  • have a steady income, and
  • can afford the down payment (though a conventional loan might require as little as 3% down).

What credit score do I need to get a conforming conventional mortgage loan? Depending on the situation, Fannie Mae generally requires borrowers to have a credit score of 620 or 640. Depending on the circumstances, Freddie Mac requires a score of 620 or 660 for a single-family primary residence. Lenders may also have stricter requirements.

Nonconforming Conventional Mortgage Loans

Other types of conventional loans, which aren't conforming, include:

  • jumbo loans (those that exceed the limits for conventional conforming loans)
  • portfolio loans (loans the lender originates and keeps, rather than selling), and
  • subprime loans (mortgages with looser credit score requirements).

What Are FHA-Insured Loans?

As the name implies, an FHA-insured mortgage loan is a loan that the Federal Housing Administration (FHA) insures. If you default on the payments 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.

FHA-insured 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.

FHA-insured loans can only be used to finance primary residences, not investment or vacation properties.

Eligibility Requirements for an FHA-Insured Loan

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 conforming mortgage, and anyone can apply.

What Credit Score Do I Need to Get an FHA-Insured Loan?

Borrowers with a FICO credit score as low as 500 might be eligible for an FHA-insured loan. Your score must be 580 or higher to qualify for the lowest down payment.

You'll Have to Pay a Mortgage Insurance Premium (MIP)

Also, you'll have to pay a mortgage insurance premium (MIP) as part of an FHA-insured loan. (Conventional mortgages have PMI, and FHA loans have MIP.) MIP will only be canceled once the mortgage is paid in full or you refinance, unless you made a down payment of at least 10%. In that case, MIP generally goes away after 11 years.

The premiums that borrowers pay go to the Mutual Mortgage Insurance Fund. FHA draws from this fund to pay lenders' claims when borrowers default.

What Are VA Loans?

A VA-guaranteed loan is a loan that the U.S. Department of Veterans Affairs (VA) guarantees. This type of loan is only available to certain borrowers through VA-approved lenders. The guarantee means the lender is protected against loss if the borrower fails to repay the loan.

Eligibility Requirements for a VA-Guaranteed Loan

To get a VA-guaranteed loan, you must be:

  • a current member of the U.S. armed forces
  • a veteran
  • a reservist/national guard member, or
  • an eligible surviving spouse.

Go to the VA website to learn the specific eligibility requirements for a VA-guaranteed loan.

No Down Payment Required, But You Have to Pay a Funding Fee

These mortgage loans can be guaranteed with no money down with no PMI requirement. However, borrowers usually have to pay a funding fee—a one-time charge between around 1.25% and 3.6% of the loan amount.

To learn more about VA-guaranteed loans, see the VA's Home Loan website.

Get Help With Your Conventional, FHA, or VA Loan

Picking the right mortgage for your situation can be daunting. If you're having trouble figuring out 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.

To learn more about different aspects of homeownership in general, get Nolo's Essential Guide to Buying Your First Home by Ilona Bray, J.D., Attorney Ann O'Connell, and Marcia Stewart.

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