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FHA Vs. Conventional Loans Vs. VA Loan – Forbes Advisor

FHA Vs. Conventional Loans Vs. VA Loan
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When it comes time to buy a home, the type of mortgage you choose is important. But with so many options, how do you know whether to apply for a conventional loan, a FHA or VA subsidized mortgage?

Each mortgage product has its advantages and disadvantages depending on your financial profile and the type of home you want to buy. We’ll walk you through the differences between these loan types to help you decide the best one you can qualify for, and save you the most money over time.

Comparing Conventional Loans, FHA and FHA

There are many types of loans available to homebuyers. But the most common are: conventional loans, FHA loans, and VA loans. They all work a little differently and have different qualification requirements.

What is a conventional loan?

The most common type of mortgage, conventional loans, is created and offered by private banks, credit unions, and other financial institutions. They are not supported by any government agency.

However, many conventional mortgages are considered “compliant” loans, meaning that they comply with loan limits set by the Federal Housing Finance Agency (FHFA). They also meet certain criteria set by the government-sponsored institutions known as Fannie Mae and Freddie Mac, which buy and guarantee these loans, then sell them as mortgage-backed securities to investors.

Conventional loans that do not meet these guidelines are known as non-conforming loans. This can include loans that exceed limits set by the FHFA (known as mega-loans) or have more flexible credit score requirements (known as sub-prime loans).

What is an FHA loan?

An FHA loan is a type of mortgage that is backed by the Federal Housing Administration (FHA). The FHA does not actually finance these mortgage loans. Instead, it secures loans made by FHA approved individual lenders so that they are financially protected if the borrower defaults.

These loans are designed for potential homeowners who would not qualify for an affordable conventional loan, especially first time home buyers, and offer more down payment requirements and a comfortable credit score. It can only be used to finance basic housing, not investment or vacation properties.

What is a VA loan?

Similar to FHA loans, VA loans are government-backed home loans that are partially guaranteed by the U.S. Department of Veterans Affairs (VA). They are issued by independent financial institutions, which are able to offer more favorable terms because the VA guarantees a part of the funds.

VA loans are specifically designed to help eligible service members, veterans, and surviving spouses become homeowners. It can be used to purchase a property as a primary residence or to refinance an existing mortgage.

Which loan is best for you?

If you are considering buying a home soon, you may be wondering which type of mortgage is best to pursue. Whether you should go with an agreement, an FHA loan or an FHA loan will depend on some factors related to your financial situation.

Down payment plays a role

One thing to consider is how much money you can save for the down payment. Here’s a closer look at the down payment requirements for each type of loan.

  • Conventional loan: It is possible to get a conventional loan at a discount of less than 3%. However, if you reduce anything below 20%, you will be required to pay Private Mortgage Insurance (PMI) until you reach the LTV ratio of 80%. The PMI is calculated as a percentage of your total loan amount and ranges from 0.58% to 1.86%.
  • FHA Loan: Unlike traditional loans, you are required to pay FHA mortgage insurance regardless of the down payment. However, if you lower the rate by at least 10%, you can drop the mortgage insurance after 11 years of repayment, otherwise it will remain for the entire term of the loan. FHA mortgage insurance requires a down payment of 1.75% of the loan amount, then annual payments of 0.45% to 1.05% of the loan amount, depending on certain factors.
  • VA loan: Unlike traditional and FHA loans, VA loans do not require a down payment. It also does not require any mortgage insurance, but it does come with a one-time financing fee of 1.25% to 3.3% of the loan amount.

debt to income

The debt-to-income ratio (DTI) measures how much total monthly income is devoted to paying off debt. Most mortgage lenders have maximum DTI requirements, but these requirements vary depending on your specific loan type.

  • Conventional loan: Most lenders will require a DTI (your potential mortgage payment, plus all other debt payments, compared to your monthly income) of no more than 45%. If you have excellent credit or a large down payment, the lender may allow a DTI guarantee of up to 50%.
  • FHA Loan: The maximum DTI allowed for an FHA loan is 57% if you have a credit score of at least 580. For borrowers with lower scores, the maximum DTI allowed by most lenders is 43%.
  • VA loan: The acceptable DTI limit for most VA loans is 41%. However, it is possible to qualify for a VA loan with a DTI of up to 60%, although you will be subject to a more extensive underwriting.

Balance history

Aside from the down payment and the DTI, your credit score will also play a factor in whether it’s a good idea to apply for a conventional loan, FHA loan, or VA loan. Below are more details about the credit score requirements for these loans.

  • Conventional loan: Lenders generally require a credit score of at least 620 to qualify for a conventional loan, although some may prefer a score of at least 660. Ultimately, the credit score requirements are up to the individual lender. The higher your credit score, the better the interest rates and loan terms you will get.
  • FHA Loan: The minimum credit score requirement for an FHA loan depends on the size of the down payment. You can get an FHA loan with a credit score as low as 580 if you put at least 3.5% down, or a credit score as low as 500 with at least a 10% down.
  • VA loan: If your credit isn’t in good shape, the good news is that VA loans have no minimum credit score requirements to qualify. However, individual lenders may have their own credit score criteria that must be met in order to be approved.

Here is a simple analysis of how these types of loans compare:

Next steps

Now that you know the basics of how conventional, FHA, and FHA loans work, it’s time to consider which ones best suit your needs.

Talk to your lender

Your lender is a good place to start. Many lenders are approved to offer several types of loans, including conventional mortgages and government-backed mortgages such as FHA and VA loans. Discuss your options and see what’s available.

Compare prices and costs

Remember, it’s not just about approval or a low monthly payment. You also need to analyze the numbers and find out how much a particular loan will cost you over the entire term. This means comparing factors such as the interest rate, mortgage insurance, closing costs, and more. It’s a good idea to get quotes from several lenders so you can compare rates and fees to find the best deal available based on your financial situation.

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