If you are looking for a home mortgage, be sure to understand the difference between a conventional, FHA, and VA loan.
Conventional, FHA, and VA loans are similar in that they are all issued by banks and other approved lenders, but there are some major differences between these types of loans. Read on to learn more about the different characteristics of conventional, FHA, and VA loans as of 2017, and find out which one might be right for you.
When you apply for a home loan, you can apply for a government-backed loan—like a FHA or VA loan—or a conventional loan, which is not insured or guaranteed by the federal government. This means that, unlike federally insured loans, conventional loans carry no guarantees for the lender if you fail to repay the loan.
For this reason, if you make less than a 20% down payment on the property, you’ll have to pay for private mortgage insurance (PMI) when you get a conventional loan. (If you default on the loan, the mortgage insurance company makes sure the lender is paid in full. Learn more about private mortgage insurance.)
Conventional mortgages fall into one of two categories: conforming and nonconforming loans. Conventional conforming mortgage loans must adhere to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and are available to everyone, but they are more difficult to qualify for than VA and FHA loans. Because there is no government insurance, conventional loans pose a higher risk for lenders so credit and income requirements are stricter than for FHA and VA mortgages.
Generally, you can get a conventional conforming loan if you:
have good credit
have a steady income, and
can afford the down payment (though a conventional loan may require as little as 3% down).
Other types of conventional loans—that are not conforming—include jumbo loans, portfolio loans, and subprime loans.
A FHA loan is a loan insured by the Federal Housing Administration (FHA). If you default on the loan and your house isn't worth enough to fully repay the debt through a foreclosure sale, the FHA will compensate the lender for the loss.
Because the loan is insured, the lender can offer you good terms including a low down payment—as low as 3.5% of the purchase price. This type of loan is often easier to qualify for than a conventional mortgage and anyone can apply. Borrowers with a FICO credit score as low as around 500 might be eligible for a FHA loan. However, FHA loans have a maximum loan limit that varies depending on the average cost of housing in a given region. (Learn more about FHA loan limits at the HUD website.)
Also, you’ll have to pay MIP (mortgage insurance premium) as part of an FHA loan. (Conventional mortgages have PMI and FHA loans have MIP.) The premiums that borrowers pay contribute to the Mutual Mortgage Insurance Fund. FHA draws from this fund to pay lenders' claims when borrowers default.
A VA loan is a loan guaranteed by the Veterans Administration (VA). This type of loan is only available to certain borrowers through VA-approved lenders. The guarantee means that the lender is protected against loss if the borrower fails to repay the loan.
To get a VA loan, you must be:
a current member of the U.S. armed forces
a reservist/national guard member, or
an eligible surviving spouse. (To learn the specific eligibility requirements for a VA loan, go to the VA website.)
VA mortgage loans can be guaranteed with no money down and there is no private mortgage insurance requirement. Borrowers do, however, usually have to pay a funding fee—a one-time charge between 1.25% and 3.3% of the loan amount. (Learn more about VA loans in Nolo’s article Veterans Home Loan Guaranty Program.)
Picking the right mortgage for your situation can be daunting. I have a team of experts that can work with you to find a solution that is best for you and your situation. Give me a call today 612.720.3298