Quick Comparison – FHA Vs VA Vs Conventional Loans Pros and Cons

Do you need to finance a home but are not sure what type of mortgage is best for you? Don’t let the different types of home loans available confuse you. Here’s a breakdown of the pros and cons of each one so you can make an inspired choice.

Federal Housing Administration (FHA) Loan

Established in the 1930s to boost household ownership rates, FHA loans are some of the most accessible loans you can get. They offer a combination of low payments, competitive rates, and flexible requirements.

Overview:

Minimum credit score: 580 but possibly lower with a higher down payment.
Minimum down payment: 3.5% of the purchase price.

Pros:

Competitive interest rates, often better than what you can get with a conventional loan.
You don’t need a great credit score to secure an FHA loan, though a good score always helps.
It allows for a higher debt to income ratio than other types of loans.
You can use gift funds to make a down payment.
You can take advantage of extendable loan limits.

Cons:

You can only finance a property that you will occupy.
Non-single-family houses may not qualify for this type of mortgage.
It requires a more rigorous house inspection, which may make some sellers uneasy.
You need to pay 20% as down payment to avoid private mortgage insurance.
You can’t cancel private mortgage insurance—you need to pay it for as long as you have the mortgage.

Who it’s best for:

FHA loans are perfect for young families who may not have money for a large down payment or a stellar credit score.

Pro tip: With a larger down payment of at least 10%, you can get an FHA mortgage with a credit score as low as 500. Consider this option if you are in a position where you simply can’t wait to finance your home until after you improve your credit score.

Veterans Administration (VA) Loan

VA loans are for active and non-active members of the military. They are partly backed by the Veterans Administration, which is why lenders deem them less risky than conventional loans.

Overview:

Minimum credit score: No minimum score required, though the better the score, the higher your chances of securing a good loan.
Minimum down payment: No down payment required.

Pros:

It helps you save money upfront because it does not require mortgage insurance or a down payment.
Generally lower interest rate compared to conventional loans.
Low closing costs compared to most other mortgages.
No early exit fee or prepayment penalty.
Flexible qualification guidelines make VA loans easy to qualify for with an acceptable credit history.
You can transfer a VA loan to a home buyer if he or she is VA-eligible.
No private mortgage insurance is needed.

Cons:

You can only get it for a residential property.
You have to pay a VA funding fee which can amount to up to 3.3% of the purchase price.
Lack of a down payment can make some sellers uneasy—they may prefer to sell to someone who gets a conventional loan.

Who it’s best for:

VA loans are ideal for members of the Reserves or the National Guard, as well as widows or widowers of those who meet the minimum service time qualifications. These categories of homebuyers will be hard-pressed to find better terms.

Pro tip: While you can secure a VA loan with a relatively low credit score, you should do all you can to improve your score before sending in your application. VA loans are only partly backed by the Veterans Association, so you should still try to make a good impression on your lender.

Conventional Loan

Accounting for around 60% of all mortgage loans, conventional loans give you a wealth of options. The only catch is that you need a good credit score and a strong application to get good rates—lenders can afford to be very choosy.

Minimum credit score requirement: A mid-range Fair score (620+).
Minimum down payment: At least 3% of the purchase price but generally 10% or more for good terms.

Pros:

Many options to choose from, including fixed rate, adjustable rate, jumbo loans, and non-conforming loans from a wide variety of lenders across regions.
You can use it to finance any type of property, including rental property or vacation homes.
Discount points and other loan features enable you to reduce interest rates and control the pace at which you pay back the money.
You can cancel it without needing to refinance the property.

Cons:

You need to put down a large down payment (usually 20%) to avoid private mortgage insurance.
Be ready to pay higher interest rates compared to a government-backed loan.
The stringent application reviewing process means you need a good credit score and a positive financial history to qualify for this type of loan.

Who it’s best for:

Whether we’re talking about fixed rate or adjustable rate mortgages, conventional home loans are suitable for borrowers with a good or excellent credit history.

Pro tip: Get your credit reports from all three bureaus, dispute inaccuracies, pay due accounts, and improve your debt to income ratio—in this way, you can secure a better conventional home loan that won’t turn into a financial burden down the years.

The Bottom Line

FHA, VA, and conventional loans each have their pros and cons. While members of the army may naturally gravitate toward a VA loan, other homebuyers need to compare carefully FHA and conventional loans to determine the best loan for them.

Ultimately, the difference will be made by their credit score, the size of the down payment they can afford to put down, and the type of property they want to buy. To simplify the choice, find a mortgage broker who understands all these types of mortgages and can confidently guide your choice.