Conventional, FHA, VA & USDA Home Loans — Which Loan Program Is Best for You?

Choosing the right mortgage program can make a significant difference in your down payment, interest rate, monthly payment, closing costs and ability to qualify.

The four most common home loan programs are:

There is no single loan program that's best for everyone. The right choice depends on your credit profile, income, debts, available down payment, military eligibility and the type and location of the property you're buying.  Here's how the major programs compare.

Quick Comparison of the Major Loan Programs

Conventional Loans

Conventional financing is generally the first loan program to consider for borrowers with good-to-excellent credit, particularly when they have a larger down payment.

Conventional loans are based primarily on guidelines established by Fannie Mae and Freddie Mac.  They differ in their rules sometimes, but for the most part they are nearly identical.

Key advantages:

• Down payments can be as low as 3% for qualifying borrowers.
• Excellent option for borrowers with stronger credit.
• Mortgage insurance can eventually be eliminated when requirements are met.
• Available for primary residences, second homes and investment properties.
• Generally more flexible than government loans regarding property condition.
• Higher loan limits than FHA in many counties.
• An appraisal waiver may sometimes be available.

Conventional financing can become considerably more expensive when the borrower has a lower credit score, especially with a small down payment. In those situations, FHA financing may provide better overall pricing.

When Conventional May Be the Better Choice

Conventional financing deserves a close look when you have good credit, a reasonable down payment or want to finance a second home or investment property.

It's also frequently the better choice for high-credit-score borrowers who want to avoid FHA's upfront and annual mortgage insurance structure.

FHA Loans

FHA loans are insured by the Federal Housing Administration and are designed to provide flexible financing for borrowers who may not be ideally suited for conventional financing.

The minimum down payment is generally 3.5%, subject to FHA requirements.

FHA can be particularly attractive for buyers with lower credit scores, limited down-payment funds or past credit problems.

Key advantages:

• Low down-payment requirement.
• More flexible credit guidelines.
• Often more forgiving of previous bankruptcies, foreclosures and other serious credit problems.
• Potentially higher allowable debt-to-income ratios.
• Interest rates can be very competitive.
• FHA Streamline Refinancing may simplify refinancing an existing FHA mortgage.

One of FHA's biggest advantages is its pricing for borrowers with less-than-perfect credit. A conventional loan may technically be available, but that doesn't necessarily mean it's the least expensive option.

An FHA loan can sometimes provide a lower overall loan price and payment, even after considering FHA mortgage insurance.

FHA Property Requirements

FHA requires an FHA appraisal, and FHA appraisers pay attention to property conditions that could affect health, safety or the property's marketability.

Deferred maintenance or significant property problems may result in repairs being required before closing.

This doesn't mean a home must be perfect to qualify for FHA financing. It simply means property condition should be considered when deciding which loan program works best for a particular transaction.

VA Loans — Zero Down for Eligible Veterans

For an eligible veteran or active-duty service member, VA financing should usually be one of the first programs evaluated.

VA loans can provide an exceptional combination of low rates, flexible underwriting and zero down-payment financing.

For eligible borrowers with full entitlement, VA financing generally does not impose a maximum loan amount, although the borrower's income, debts and overall ability to qualify still determine how much can actually be borrowed.

Major VA advantages include:

VA loans normally include a VA funding fee, although certain eligible veterans are exempt from paying it. The funding fee can generally be financed into the loan.

VA Appraisals and Property Condition

VA loans require a VA appraisal performed by a VA-approved appraiser.

The property must satisfy VA's Minimum Property Requirements. If significant health, safety or property-condition problems are identified, repairs may need to be completed before the loan can close.

VA property requirements can therefore be an important consideration when purchasing a home that needs substantial repairs.

USDA Loans — Zero Down in Eligible Areas

USDA financing is another zero-down-payment mortgage option, but unlike VA financing, eligibility is primarily based on the property's location and household income.

Despite the name "rural housing," USDA financing isn't limited to farms or extremely remote locations. Many smaller communities and areas outside major metropolitan centers may qualify.

Two questions should be answered early:

Is the property USDA eligible?

Is the household income within USDA limits for that area?

If the answer to both is yes, USDA can be an excellent alternative to FHA financing.

USDA Advantages

USDA does have some additional restrictions that Conventional, FHA and VA loans may not have.

For example, USDA applies household-income limits, property-location requirements and specific debt-to-income guidelines. There can also be restrictions involving ownership of another home and properties with significant income-producing or commercial characteristics.

Because USDA eligibility is more specialized, it's important to review both the borrower and the property before relying on USDA financing.

What About Jumbo Loans?

A jumbo loan generally refers to financing above the applicable conforming loan limit, although lenders may offer proprietary jumbo programs at different loan amounts.

Jumbo underwriting tends to be more restrictive.

Borrowers may need:

• Higher credit scores.
• Larger down payments.
• More cash reserves.
• Lower debt-to-income ratios.
• More extensive income and asset documentation.

Jumbo pricing also varies considerably between lenders, making comparison shopping particularly important.

Which Mortgage Program Has the Lowest Rate?

This is where mortgage shopping can get confusing.

The program advertising the lowest interest rate isn't automatically the least expensive loan.

You need to compare the entire loan price, including:

• Interest rate.
• Lender fees or points associated with that rate.
• Mortgage insurance.
• Upfront FHA, VA or USDA fees when applicable.
• Monthly payment.
• Down-payment requirement.
• Long-term cost of the loan.

A lower rate with substantially higher fees may be a worse deal than a slightly higher rate with little or no lender cost.

Shop the loan price — not just the rate.

Your Credit Score Can Change Which Loan Is Best

One of the biggest mistakes a borrower can make is assuming one loan program is automatically better than another.

For example, a borrower with excellent credit might receive very attractive Conventional financing.

Another borrower purchasing the same house with the same down payment but a lower credit score might receive substantially better pricing through FHA.

An eligible veteran may find that VA financing beats both.

And a buyer purchasing an eligible property may discover that USDA provides an attractive zero-down alternative.

That's why loan programs should be compared using your actual financial situation, rather than selected based on a generic rule.

Lender Overlays Can Affect Your Approval

Here's something many borrowers don't realize:

The basic guidelines established by Fannie Mae, Freddie Mac, FHA, VA and USDA aren't always the only rules involved.

Individual lenders can impose additional requirements known as lender overlays.

A borrower can therefore be declined by one lender even though the loan meets the underlying program guidelines.

That doesn't necessarily mean the borrower can't qualify.

It may simply mean that particular lender won't approve the loan.

This is one of the advantages of working with an experienced mortgage broker who has access to multiple wholesale lenders. If one lender has a restrictive overlay, another lender may have a program that fits the borrower better.

So, Which Home Loan Is Best?

A simplified way to look at the four major programs is:

• Conventional: Often best for borrowers with stronger credit, particularly with a larger down payment.
• FHA: Often an excellent choice for borrowers with lower credit scores, smaller down payments or previous credit problems.
• VA: Usually one of the strongest options available for eligible veterans and service members, with zero-down financing and highly competitive terms.
• USDA: An excellent zero-down option for income-qualified buyers purchasing an eligible property.

But those are only general guidelines.

The best way to determine which program is right for you is to price and qualify several programs side by side.

Don't Just Ask, "What's Your Rate?"

Instead, ask:

What loan program gives me the best combination of rate, lender fees, mortgage insurance, down payment and monthly payment based on my specific situation?

That's a much better question.

I've been helping borrowers navigate Conventional, FHA, VA, USDA, Jumbo and other mortgage programs for decades.

My approach is simple: compare the available options, explain the numbers in plain English and help you choose the loan that makes the most financial sense for you.

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