Conventional vs. FHA and VA loans: Find out which mortgage is right for you

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For most mortgage borrowers, there are three major loan types: conventional, FHA and VA. Each loan comes with a different set of qualifications, benefits and drawbacks. To get an idea of which loan might be right for you, here’s how they compare.

Conventional vs. FHA vs. VA loans
Conventional loan FHA loan VA loan
3% minimum down payment; 20% to avoid private mortgage insurance (PMI) 3.5% minimum down payment No minimum down payment
620 minimum credit score 580 minimum credit score with 3.5% down; 500 minimum credit score with 10% down No minimum credit score
No PMI upfront, but fees monthly if putting less than 20% down 1.75% PMI upfront, with fees yearly 1.25%-3.3% funding fee upfront
Best for borrowers with excellent/good credit Best for borrowers with lower credit scores or high debt-to-income ratios Best for service members and veterans and their spouses

Conventional loan vs. FHA loan

A conventional loan is a mortgage not backed or insured by the government, such as Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Department of Agriculture (USDA) loan programs. Conventional loans typically have fixed interest rates and terms.

In contrast, an FHA loan is a loan insured by the Federal Housing Administration. The FHA doesn’t lend money; it backs qualified lenders in case of mortgage default. There are certain criteria both borrowers and lenders must meet to get FHA approval.

Conventional loans are one of the most popular types of mortgages and ideal for borrowers with good or excellent credit. However, depending on the financial institution and the borrower’s circumstances, those with poorer credit might still qualify for a conventional loan. Usually, credit unions and independent banks, which often have more personalized relationships with their customers, are more likely to bend conforming loan rules, which most big banks follow.

By comparison, FHA loans have flexible lending standards, so they are typically suitable for:

  • People whose house payments will be a big chunk of take-home pay
  • Borrowers with lower credit scores
  • Homebuyers with small down payments and refinancers with little equity

The FHA allows borrowers to spend up to 57 percent of their income on monthly debt obligations, such as their mortgage, credit cards, student loans and car loans. Conventional mortgage guidelines tend to cap debt-to-income (DTI) ratios at around 43 percent.

Borrowers can qualify for an FHA loan with a credit score of 580 and even lower. For conventional loans, the credit score minimum is typically 620. For many FHA borrowers, the minimum down payment is 3.5 percent, while for conventional loan borrowers, the minimum down payment is 3 percent.

Both conventional loans and FHA loans have mortgage insurance premiums, but for a conventional loan, paying them is only a requirement if the borrower is putting down less than 20 percent. FHA loans, on the other hand, have two mortgage insurance premiums:

  • An upfront premium of 1.75 percent of the loan amount, paid at closing
  • An annual premium that varies

Most FHA borrowers get 30-year mortgages with down payments of less than 5 percent, making their annual mortgage insurance premium 0.8 percent of the loan amount per year, or $66.67 a month for a $100,000 loan.

With a conventional loan, borrowers can cancel mortgage insurance once their balance drops down to 80 percent of the home’s value. FHA borrowers don’t have this option.

To summarize, a conventional loan could be your best choice if:

  • You have good or excellent credit, with a credit score of at least 620, to be able to qualify for the lowest interest rates.
  • You’re purchasing a rental property, vacation or second home, or a property you plan to fix up and flip.
  • You have enough money saved for a 20 percent down payment so you avoid paying for mortgage insurance.

An FHA loan could be your best choice if:

  • Your credit isn’t perfect, but your credit score is at least 580 and you can put down 3.5 percent of the purchase price (or, your credit score between 500 and 579 and you have a 10 percent down payment).
  • You plan to live in the property.
  • The purchase price meets FHA mortgage limits.

Conventional loan vs. VA loan

VA loans are insured by the U.S. Department of Veterans Affairs, or VA. The VA doesn’t lend money; it insures qualified lenders. If a borrower defaults on their home loan, then the lender is protected by the VA.

Lenders and borrowers must both meet qualifications to be VA-eligible. In general, veterans don’t have to be first-time buyers, and may reuse their benefit. 

The VA doesn’t guarantee the full amount of the loan, which means borrowers might be subject to additional requirements from their lender. The amount the VA guarantees, which varies by county, might affect how much the lender is willing to lend.

Unlike conventional loans, VA loans have no down payment requirement if the borrower is buying a primary residence. VA loans also don’t require borrowers to pay mortgage insurance, in contrast to conventional loans with less than 20 percent down and FHA loans.

However, the VA charges an upfront VA funding fee, which can be rolled into the loan or paid by the seller. The funding fee varies from 1.25 percent to 3.3 percent of the loan amount.

In addition, the VA allows sellers to pay closing costs but doesn’t require them to, so the buyer might need money for closing costs. Borrowers may also need money for the earnest-money deposit.

A VA loan could be your best choice if:

  • You or your spouse are a military servicemember or veteran
  • You don’t have money for a down payment
  • Your credit score is fair or poor
  • You plan to occupy the home

FHA loan vs. VA loan

FHA loans and VA loans are both government-insured mortgages. The distinction is that VA loans are available to eligible military servicemembers, veterans and surviving spouses, while FHA loans are available to any borrower who qualifies under FHA lending standards.

Additionally, FHA loans come with lifetime mortgage insurance; VA loans have no mortgage insurance requirement, but they charge a funding fee. The amounts of both the funding fee and FHA mortgage insurance premiums vary.

For borrowers eligible for a VA loan, it may make sense to compare it with an FHA loan, or even a conventional loan, to ensure the lowest possible rate.

Which is better: conventional, FHA or VA?

In addition to whether you meet the necessary requirements, consider your finances, needs and preferences when comparing a conventional loan to an FHA or VA loan. If you qualify, conventional mortgages generally pose fewer hurdles than FHA or VA mortgages, which may take longer to process.

Remember that conventional loans are usually better suited for borrowers with a higher credit score, while FHA and VA loans can be ideal for those with a lower score. Like an FHA loan, a conventional loan requires PMI payments, but only if you’re putting less than 20 percent down, and the payments can be removed when you hit a certain equity threshold.

With an FHA loan, you can’t get rid of PMI unless you refinance or pay off the mortgage. With a VA loan, there is no PMI requirement, but you’ll have to pay a funding fee based on the amount of the loan.

Next steps

Now that you’re familiar with the basics on conventional, FHA and VA loans, dig deeper to find the perfect form of financing for you:

Written by
Jeanne Lee
Contributing writer
Jeanne Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances.
Edited by
Mortgage editor