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

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When determining the best mortgage option for buying a home, it can feel like you’re caught in a three-sided battle: conventional vs. FHA vs. VA. There’s no clear-cut winner of these home loan options, as each comes with its own set of qualifications, upsides and downsides. It all depends on your individual needs.

Conventional vs. FHA vs. VA loans

Before you begin comparing loan programs, it’s important to know three key pieces of information:

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Conventional loan vs. FHA loan

A key differentiator between conventional vs. FHA loans is that a conventional loan has a higher credit score requirement than an FHA loan, which is backed by the Federal Housing Administration (FHA). FHA loans are generally a better fit for borrowers with lower scores.

Another distinction: If you put down less than 20 percent on a conventional loan, you’ll have the ability to cancel the PMI once you cross the 20 percent equity threshold. With FHA loans, those pesky mortgage insurance premiums will continue until you pay the mortgage off or refinance into a conventional loan.

Conventional loan FHA loan
Minimum credit score 620 500 with 10% down; 580 with 3.5% down
Maximum DTI ratio 43% Up to 50%
Minimum down payment 3% (20% to avoid private mortgage insurance or PMI) 3.5% with 580 credit score; 10% with 500-579 credit score
Mortgage insurance Private mortgage insurance (PMI) if less than 20% down 1.75% upfront FHA mortgage insurance (MIP) and annual MIP if less than 20% down
2021 loan limits $548,250 in most areas; $822,375 in high-priced areas $356,362 in most areas; higher limits in high-priced areas and for multi-unit homes
Eligible properties You can live in the home, or it can be an investment/rental property or second/vacation home You must live in the home
Closing costs Generally 2%-5% Generally 2%-6%
Refinance options Conventional rate-and-term refinance; conventional cash-out refinance FHA simple refinance; FHA streamline refinance; FHA cash-out refinance
Interest rates Current conventional loan rates Current FHA loan rates

Conventional loan vs. VA loan

Military service members, veterans and their spouses can qualify for VA loans. These are backed by the U.S. Department of Veterans Affairs (VA), and they come with one especially notable benefit: You don’t have to contribute any money to a down payment. While you’ll have to get a Certificate of Eligibility from the VA that shows you satisfied service requirements, meeting the other requirements is generally easier compared to a conventional loan. Some lenders also accept lower credit scores for VA loans.

You won’t have to pay mortgage insurance on a VA loan, even though you’re not making a down payment, but there is a funding fee, which varies based on how much you’re putting down and whether you’ve gotten a VA loan prior.

Conventional loan VA loan
Minimum credit score 620 None unless lender requires
Maximum DTI ratio 43% None, but 41% is standard
Minimum down payment 3% (20% to avoid private mortgage insurance or PMI) None
Mortgage insurance Private mortgage insurance (PMI) if less than 20% down 1.4%-3.6% VA funding fee, depending on down payment (if making) and usage
2021 loan limits $548,250 in most areas; $822,375 in high-priced areas $548,250 in most areas; $822,375 in high-priced areas
Eligible properties You can live in the home, or it can be an investment/rental property or second/vacation home You must live in the home
Closing costs Generally 2%-5% Generally 3%-5%
Refinance options Conventional rate-and-term refinance; conventional cash-out refinance VA Interest Rate Reduction Refinance Loan (IRRRL, also known as VA streamline refinance); VA cash-out refinance
Interest rates Current conventional loan rates Current VA loan rates

FHA loan vs. VA loan

FHA loans and VA loans share one main commonality: The government insures both of them. However, if you satisfy the eligibility requirements for a VA loan, you’ll find better terms, bigger buying power and fewer fees with a VA loan vs. an FHA loan. Since VA loans don’t charge lifetime mortgage insurance premiums, you’ll likely enjoy smaller bills by going this route. Still, with buying a home, it’s worth comparing all your options.

FHA loan VA loan
Minimum credit score 500 with 10% down; 580 with 3.5% down None unless lender requires
Maximum DTI ratio Up to 50% None, but 41% is standard
Minimum down payment 3.5% with 580 credit score; 10% with 500-579 credit score None
Mortgage insurance 1.75% upfront FHA mortgage insurance (MIP) and annual MIP if less than 20% down 1.4%-3.6% VA funding fee, depending on down payment (if making) and usage
2021 loan limits $356,362 in most areas; higher limits in high-priced areas and for multi-unit homes $548,250 in most areas; $822,375 in high-priced areas
Eligible properties You must live in the home You must live in the home
Closing costs Generally 2%-6% Generally 3%-5%
Refinance options FHA simple refinance; FHA streamline refinance; FHA cash-out refinance VA Interest Rate Reduction Refinance Loan (IRRRL, also known as VA streamline refinance); VA cash-out refinance
Interest rates Current FHA loan rates Current VA loan rates

Which is better: Conventional, FHA or VA?

Consider your finances, needs, preferences and what you can qualify for when you’re weighing the pros and cons between a conventional vs. FHA vs. VA loan. If you qualify, conventional mortgages generally pose fewer hurdles than FHA or VA mortgages, which might 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 mortgage insurance payments, but only if you’re putting less than 20 percent down. Additionally, the payments can be removed when you hit a certain equity level. With an FHA loan, you can’t remove MIP unless you refinance or pay off the mortgage. With a VA loan, there is no mortgage insurance requirement, but you’ll have to pay a funding fee based on the amount of the loan.

It’s also important to note that refinancing an FHA or VA loan can be easier than refinancing a conventional mortgage. Both FHA and VA offer streamlined refinancing, which allows you to bypass some steps in the process, like submitting some financial documentation or waiting on an appraisal.

Next steps

Now that you’ve completed Bankrate’s conventional vs. FHA vs. VA crash course, dig deeper to find the kind of financing that will best fit your lifestyle: