FHA, VA, USDA and Conventional Loans Explained

Not all mortgages are created equal. The type of home loan you choose affects how much money you need for a down payment, what credit score you need to qualify, whether you'll pay mortgage insurance and how much the loan costs over time. For many buyers, especially first-timers, understanding the four main loan types can be the difference between waiting years to buy and getting into a home sooner.

Conventional loans

A conventional loan is a mortgage that isn't insured or guaranteed by the federal government. Many conventional loans follow standards set by Fannie Mae and Freddie Mac, two government-sponsored companies that buy mortgages from lenders. Because these loans meet their guidelines, they're sometimes called conforming loans.

Conventional loans often work best for borrowers with good credit and stable income. While many people think you need 20% down to buy a home, that isn't necessarily true. Some conventional loan programs designed for first-time or lower-income buyers allow down payments as low as 3%.

If you put down less than 20% on a conventional loan, you'll typically pay private mortgage insurance, or PMI. PMI protects the lender if you stop making payments, and it adds to your monthly cost. The good news is that PMI on conventional loans can be removed once you build enough equity, which can lower your payment later.

FHA loans

FHA loans are insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development, or HUD. Because the government insures these loans, lenders can offer more flexible requirements, which makes FHA loans especially popular with first-time buyers and people whose credit isn't perfect.

According to HUD, borrowers with a credit score of 580 or higher may qualify with a down payment of 3.5%. Borrowers with scores between 500 and 579 generally need to put down at least 10%. FHA loans can also be more forgiving of higher debt levels compared with some conventional loans.

The trade-off is mortgage insurance. FHA loans charge an upfront mortgage insurance premium, which is often rolled into the loan amount, plus an annual premium that's paid as part of your monthly payment. Depending on your down payment, that annual premium may last for 11 years or for the entire life of the loan. Because of this, some FHA borrowers later refinance into a conventional loan once they've built enough equity, in order to remove the mortgage insurance.

VA loans

VA loans are guaranteed by the U.S. Department of Veterans Affairs and are available to eligible active-duty service members, veterans and some surviving spouses. They're widely considered one of the best mortgage benefits available.

VA loans often require no down payment at all, and they don't charge monthly mortgage insurance, which can save borrowers a significant amount each month compared with other low-down-payment loans. Instead, most borrowers pay a one-time VA funding fee, which can usually be financed into the loan. Some borrowers are exempt from the funding fee, such as veterans who receive compensation for a service-connected disability.

To get a VA loan, you'll need a Certificate of Eligibility, which confirms your service history. You can request one through the VA, and many lenders can help you obtain it.

USDA loans

USDA loans are backed by the U.S. Department of Agriculture and are designed to help buyers purchase homes in eligible rural and some suburban areas. Many people are surprised to learn how many areas qualify, including some communities near larger cities.

USDA loans can offer financing with no down payment. However, there are income limits, which vary by location and household size, and the home must be located in an eligible area. USDA loans charge guarantee fees, both upfront and annually, which function somewhat like mortgage insurance. You can check whether a property and your income qualify using the eligibility tools on the USDA's website.

How to choose the right loan

Start by checking whether you qualify for a VA or USDA loan. If you do, these options can allow you to buy with little or no money down and often with lower ongoing costs. If you don't qualify, compare FHA and conventional loans, especially if your credit score or down payment is modest.

When comparing loans, look beyond the interest rate. Consider the total cost, including mortgage insurance, upfront fees and how long you expect to keep the loan. A loan with a slightly lower rate but expensive lifetime mortgage insurance may cost more over time than a loan with a slightly higher rate and removable PMI.

It's also smart to get Loan Estimates from at least two or three lenders for the same type of loan. Lenders can differ significantly in rates and fees, and comparing standardized Loan Estimates makes it easy to see the differences.

Free help is available

Navigating loan options can feel overwhelming, but you don't have to do it alone. HUD-approved housing counseling agencies offer free or low-cost guidance to homebuyers. A counselor can review your finances, explain which loans you might qualify for and help you prepare for the buying process. You can find one through HUD or the Consumer Financial Protection Bureau's website.