VA vs. FHA vs. Conventional Loans

When you’re buying a home, it’s easy to feel overwhelmed with the variety of available mortgage options. Each type of mortgage brings with it a unique set of characteristics, pros, and cons. Choosing the right option for your circumstances matters. Let’s go through the differences, pros, and cons of VA loans, FHA loans, and conventional loans.

VA vs. FHA vs. conventional loans

VA loans, FHA loans, and conventional loans are three of the most popular types of mortgage products on the market. Each of these loans is best suited to a different type of borrower, so we’ll start by breaking down the basics of each loan type.

What is a VA loan?

A VA loan is a type of mortgage that’s backed by the Department of Veterans Affairs. These loans are still originated by private mortgage lenders, but because the VA guarantees a portion of them, lenders are able to provide more flexibility and better loan terms to borrowers.

VA loans are specifically designed for military members and veterans with a Certificate of Eligibility. To qualify, you’ll have to meet certain active-duty service requirements that range from 90 to 181 days, depending on when you served. You can also qualify as a National Guard or Reserve member if you’ve served for at least 90 days. Finally, you can also qualify for a VA loan if you don’t meet the service requirements, but have a service-connected disability.

VA loans offer many benefits to borrowers, including no down payment requirement, low interest rates, limited closing costs, and no private mortgage insurance, even if you don’t have a down payment. Additionally, the VA loan benefit is one that service members and veterans can use multiple times throughout their lives.

What is an FHA loan?

An FHA loan is another type of government-backed loan, but this one is secured by the Federal Housing Administration. While there’s no income cap on FHA loans, they’re generally designed for low- to moderate-income mortgage borrowers who may not qualify for a conventional loan. They’ve become a popular option with first-time homebuyers because they require lower credit scores than other types of mortgages. In fact, more than 83% of FHA borrowers were first-time buyers in 2020, according to an FHA Annual Report.

Like VA loans, FHA loans are backed by a government agency but are originated by private lenders. In most cases, lenders wouldn’t accept the risk of giving a mortgage to a borrower with bad credit. Because the government guarantees the loan—meaning they’ll cover the bank’s losses if the borrower defaults—lenders can be more flexible.

What is a conventional loan?

The term “conventional loan” refers to any mortgage that isn’t a part of a federal government program. Conventional mortgages can either be conforming or non-conforming. A conforming loan is one that meets the loan limits for Fannie Mae and Freddie Mac set by the Federal Housing Finance Agency. A non-conforming loan, on the other hand, is one that exceeds those limits.

Conventional conforming loans are the most popular type of mortgage on the market. Because they aren’t backed by a government agency, they usually have stricter eligibility requirements than VA and FHA loans. However, they also offer certain advantages and flexibility.

Differences between a VA, FHA, and conventional loan

There are some important differences between VA loans, FHA loans, and conventional loans to keep in mind when deciding which one is right for you. Below, we’ve broken down some of the biggest differences.

*Exceptions are available allowing borrowers to qualify with a higher DTI

Eligibility

Anyone can be eligible for an FHA or conventional loan as long as they meet the financial requirements set by the mortgage lender and/or the government agency backing the loan. The VA loan is the only one that limits eligibility to a certain type of borrower. To qualify for a Certificate of Eligibility for this type of loan, you’ll have to meet the military service requirements set by the VA.

Credit score

Another important difference between VA, FHA, and conventional mortgages is the minimum credit score required to qualify. Fortunately military members and veterans, there is no credit score required to qualify for a VA loan. For a conventional loan, you’ll generally need a minimum credit score of 620, but individual lenders may have stricter requirements.

The credit score requirements for FHA loans are a bit more complicated. You can qualify for an FHA loan with a minimum credit score as low as 500, but only if you provide a 10% down payment. If you’d rather provide a lower 3.5% down payment, you’ll need a credit score of at least 580.

Debt-to-income ratio

Your debt-to-income ratio (DTI) is the percentage of your gross income that goes toward debt payments. When lenders calculate your DTI, they consider what it would be with the addition of a mortgage. For each type of loan, your DTI with the mortgage and other debt payments must be under a certain threshold.

The DTI ratios for VA, FHA, and conventional loans are quite similar. You’ll generally need a DTI of 41% or less for a VA loan, 45% or less for an FHA loan, and 43% or less for a conventional loan. However, there are exceptions to all three of these rules. With certain exceptions and the blessing of your lender, you can qualify with a DTI as high as 60% for a VA loan, 57% for an FHA loan, and 50% for a conventional loan.

Loan limits

There are no maximum limits on VA mortgages, meaning you can borrow as much as your DTI and personal budget allow you to qualify for. However, both FHA and conventional loans have limits on the amount someone can borrow.

For both FHA and conventional loans, there are two limits. One limit applies to the low cost of living areas, and one applies to the high cost of living areas. Conventional loan borrowers can technically exceed the limits. This is known as a jumbo loan and has an entirely different set of requirements.

Down payments

There is no down payment requirement for a VA loan, meaning borrowers can buy a home with as little as 0% down. For a conventional loan, there’s a minimum 3% down payment requirement. However, individual lenders may require more, especially if you have a credit score on the low end of the minimum.

As we mentioned above, the down payment you’ll need for an FHA loan depends on your credit score. If your credit score is above 580, you can put as little as 3.5% down. But if your credit score is lower than 580, you’ll need a down payment of at least 10%.

Extra costs

When you borrow a VA loan, you will have to pay a funding fee for your loan. The amount you’ll pay is based on your down payment and whether it’s your first time using a VA loan. It can range from 1.4% to 3.6% of the loan amount.

Both FHA loans and conventional loans require mortgage insurance, but they work a bit differently.

• Conventional loan. With a conventional loan, you’ll pay private mortgage insurance (PMI) if your down payment is less than 20% of your loan, and you’ll pay this until you reach 20% equity in the home.
• FHA loan. There are two types of mortgage insurance with an FHA loan. First, you’ll pay an upfront mortgage insurance premium (MIP) as a part of your closing costs. You’ll also pay ongoing MIP, either for 11 years or the entire loan term, depending on your down payment.

VA vs. FHA vs. conventional loan: Which is best for you?

Each of the types of loans we’ve discussed can be a great option for homebuyers. Rather than one type of mortgage being the best overall, it comes down to which is best for your situation.

The most important factor to consider when choosing the best type of mortgage for you is your finances. Look at your credit score, your DTI, the amount you’re able to put down, and more to see which mortgage loans you might qualify for.

Another thing to consider in today’s housing market is whether your offer is likely to be accepted based on the type of loan you have. Sellers tend to prefer conventional loans versus government-backed loans because of the additional hoops government loans often require. If you’re buying a home in a competitive housing market, you may have more success with a conventional loan.

That being said, military members and veterans may feel the benefits of a VA loan outweigh those complications. It’s true that the flexibility with the down payment, borrowing limits, and the fact that you don’t have to pay mortgage insurance can be attractive.

Finally, while conventional loans may simplify the buying process, not everyone can qualify for that type of loan. If you strongly desire to become a homeowner and your credit score doesn’t meet the requirements of a conventional loan, the FHA loan can still be a great option.

FAQs

Which is better, an FHA loan or a conventional loan?

There’s not necessarily one type of loan that’s better than the rest. Instead, the best type of loan for you is the one that works best for your situation. However, if you qualify for both an FHA and conventional loan, the terms of a conventional loan are likely preferable.

Why do sellers prefer conventional loans over FHA and VA loans?

FHA and VA loans often have stricter requirements that can make the closing process more difficult. As a result, if given the choice, sellers may be more likely to accept an offer with a conventional mortgage.

How much money down do you need for a conventional loan?

Conventional loans require a minimum down payment of at least 3%. However, individual lenders may require more money down based on your credit score and other factors.

Are conventional loans easier to close than FHA or VA loans?

Conventional loans may be easier to close than FHA or VA loans. This is because government-backed loans require that properties meet certain requirements in terms of safety, security, and soundness. Meeting these requirements may mean work needs to be done on the home before the closing.

Erin Gobler

Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.