You’re trying to get a loan for your dream home and wondering what is the difference between FHA, VA, and conventional loans. We get it, it’s totally confusing.
When you’re looking to purchase a home one of the biggest challenges is figuring out how you’re going to pay for it.
There are really four different types of guaranteed loans you can choose from – conventional, FHA, VA, and USDA – but we’re going to cover USDA in a later article. It’s in a category of it’s own.
Don’t sweat it, there are many options and we’ll guide you through them.
What is a Home Loan?
A home loan (also known as a home mortgage or simply a mortgage) is when a lender or bank give money to a borrower for a home or any piece of livable property.
Think of it like this. You want to buy a $300,000 home, it’s perfect and everything you ever imagined your family making memories in. But you don’t have $300,000.
So a lender covers part of the cost or the full cost of the home so you can live in it, however, you make monthly payments to the lender. These payments may be spread out over many years, of which 15 and 30 year payment plans are the most common.
That may seem simple enough, it is indeed more complicated and therefore there are several types of home loans to fit various situations.
Why Are There Different Types of Home Loans?
For FHA and conventional loans, a lender will want a buyer to put at least some money down. This may be 5%, 10%, or 20% of the purchase price of the home. At first this may not seem like a small percentage, but to most it’s a lot of money.
Looking back at that $300,000 home, 20% equates to $60,000. Still a huge chunk of change for most Americans.
So how do these homes get sold if nobody can afford them?
Easy, create more options that don’t necessarily require a full 20% down payment.
Since everyone’s financial and personal situations are different, there is not one loan program that fits everyone. Therefore, you’ll have to take into consideration your situation.
Your Credit Matters, It’s About Trustworthiness and Risk
How’s your credit? Don’t answer that right now. It’s a very personal question and something many are uneasy diving into.
That’s okay, but you will have to get into the nitty gritty details with your lender.
Regardless if you’re looking at FHA, VA, or conventional loans, lenders are going to want to know how trustworthy you can be with money. They’re accepting the risk of paying for your house, so they’re going to want to make sure you pay them back.
Speaking of risk, keep in mind that the less you put down as a down payment the more risk the bank or lender incurs. With that, they may require a higher credit score or credit profile in order to qualify for the home.
Minimum Down Payment for a Home
We discussed the 20% down option associated with conventional home loans, but what about the others? Let’s discuss options for a minimum down payment for a home.
An FHA mortgage requires a minimum of 3.5% of the purchase price as a down payment. On the aforementioned $300,000 home, that comes out to $10,500. That’s more palatable than the $60,000 down.
It does get better, however. If you’re a veteran and meet the requirements for VA loans, you could get a home with 0% down. That’s right, that is $0.00 on our $300,000 house.
Keep in mind, when you put less money down the lenders may require higher credit scores and your payments will inherently be higher.
Just because you can drop a ridiculously low down payment – or none at all – doesn’t mean you necessarily should. It’s a consideration.
What is a Conventional Home Mortgage Loan?
We’ll start off with the most common and the easiest to get approved for, pending you have the cash for it.
A conventional mortgage is a home loan that is not backed or guaranteed by any government organization like FHA and VA loans. These loans may be
The typical down payment for a conventional mortgage loan is 20%. Some banks may offer conventional loans with lower down payments, say 15% or 10%, but they will require a private mortgage insurance, or PMI. This is a monthly fee tacked onto your mortgage.
In addition to the higher down payment, your interest rates may be a bit higher and they typically require a higher credit score. There are exceptions (Fannie Mae and Freddie Mac), however, this is because the government is not guaranteeing the loan.
Still want to buy a home but don’t have the 20% down? The FHA or VA loans may be a suitable choice.
What is a FHA Mortgage Loan?
FHA loans are just like VA or conventional loans, however, the Federal Housing Administration (hence FHA), is insuring the lender in case you default on the loan.
What all of this means to you is you might be able to get a home loan with a lower down payment and lower credit score requirements than a conventional loan. There are some stipulations, but nonetheless it helps you as the buyer out.
With a FHA loan the minimum credit score is 580 and the minimum down payment is 3.5%. Depending on the lender, you may lower the credit score requirement if you pay a larger down payment.
Of course this sounds great, but there is a few catches.
First, if you pay less than 20% for the home you will be required to pay a PMI, just like the conventional mortgages.
Secondly, you have to occupy the home within 60 days of closing. That means, this cannot be a rental/investment property, it has to be your primary residence.
Lastly, you’ll be required to have a home inspection to ensure the home meets the FHA’s minimum property standards. The home doesn’t have to be fancy, they just want to be sure that they’re not paying for a heap of trash.
What’s a VA Loan?
The VA loan by the Veterans Administration is a lot like the FHA loan we discussed above but only for qualified US Armed Forces veterans. However, some of the benefits are different and the requirements are much different.
With a VA loan, buyers can get the benefit of paying 0% down on a home without having to pay a PMI like the FHA loan. While that sounds insane, which it pretty much is, it does have some drawbacks.
The initial money down when you close might not be much, you will have a higher monthly payment because you’re getting a loan for more money (hint, the more you put in the down payment, the less you have to get a loan for, the less your monthly payment is).
Additionally, there are some fees associated with VA loans, but you will be able to roll those into the loan.
Of course you will need to find a lender that offers VA loans as not all of them do. With the Killeen and Harker Heights area being in such proximity to Fort Hood, there’s no shortage of VA lenders.
There’s a lot to unpack when discussing the difference between FHA, VA, and conventional loans.
If you’d like to play around to see what your monthly payment would be for a home loan, check out our mortgage calculator to get an idea of your purchasing power.
Also, if you have any questions or want to discuss some home loan options for your next Central Texas home, I’d love to talk with you. We can discuss the various loans and I can recommend some awesome lenders in the local area. Just give me a call, text, or email and we can get started.