The alphabet soup of different loan types can have a homeowner bewildered. VA, FHA, USDA – what do all the acronyms mean and what kind of loan is suitable for your financial situation? To help with our mortgage ABCs let’s compare VA, FHA, USDA, and conventional loans. We’ll look at their requirements to help you figure out which one is best for you.
Comparing VA, FHA, USDA and Conventional Loans
One of the most significant divisions in loan types is government-insured vs. conventional loans. As implied, government-insured loans have the backing of the federal government while private companies back conventional loans. You will often need to meet specific criteria for a government-issued loans while conventional loans require their unique qualifications.
The most common government-issued and conventional loan types include VA, FHA, USDA, and a variety of privately backed loans. Let’s pick through the unique pros and cons, so you know your options and the best qualities of each.
Government-Insured Real Estate Loans
Pros and Cons of VA Loans
As the name implies, Veterans Affair (VA) loans are only available to U.S. military veterans and their direct family. VA loans are very favorable to borrowers with no down payments or mortgage insurance requirements. There aren’t many cons against VA loans rather than a mandatory service requirement.
Pro and Cons of FHA Loans
Federal Housing Authority (FHA) loans are the most popular for first-time homebuyers since they offer lower credit score and down payment requirements. A potential homebuyer with a score as little as 590 can get down payments at 4% or less. You can also let a relative co-sign an FHA loan for more flexible requirements.
Though they’re accessible for most homebuyers, FHA loans require more rules than other loan types. You might be required to purchase mortgage insurance with an FHA loan or take out additional insurance policies. The paperwork and headaches of FHA loans can lead some first time home buyers to conventional loans.
Pros and Cons of USDA Loans
USDA loans are meant for rural borrowers who meet individual income requirements. Because they’re meant for low to moderate-income borrowers in rural areas, not everyone qualifies for USDA loans. If you do qualify, expect a low to no down payment.
Pros and Cons of Conventional Loans
Many homeowners won’t qualify for a government-insured loan, so they’ll need to look at conventional loan types. Because they’re the most popular loan there’s plenty of choice in traditional home loan providers and easy to find a company that works well for your situation. On the other side, conventional loans require larger down payments and higher credit scores than government-insured loans. Low income or low credit score applicants can still qualify for conventional loans. However, you’ll need to take out mortgage insurance if they can’t meet a 20% down payment. Unlike government-issued loans, homebuyers can choose their mortgage insurance policy and company.
Fixed vs. Variable Loans
Before signing any loan, you’ll need to determine if you want a fixed or adjustable-rate mortgage (ARM). Most government-insured loans are fixed, but conventional loans can have an adjustable or fixed annual percentage increase (APR). Fixed means the interest rate stays the same throughout the mortgage while ARMs start lower but slowly increase. Unless you plan to refinance or pay off the loan right away quickly, a fixed rate will normally save you the most over the long run.
How Down Payments Affect Your Loan
How Down Payments Affect Government-Insured Loans
Most government-backed loans don’t require large down payments, and some don’t need any down payment at all. Government-insured loans are generally aimed at lower-income Americans, so there isn’t as much expected of down payment. If you can make a sizeable down payment, you might not qualify for a government-insured loan. If you are eligible to make a large down payment on a government-insured loan, you can expect lower monthly rates.
How Down Payments Affect Conventional Loans
Conventional loans will require down payments anywhere from five to thirty percent of the total purchase price depending on your credit score and several other factors. Around twenty percent of the purchase price is the most common down payment requirement for a conventional loan. The larger the down payment, the less your monthly mortgage payments. A large down payment can get you better rates, lower payments, and can give you the edge in a competitive market. Potential homeowners using conventional loans should always save up for the biggest possible down payment.
Your Best Personal Loan
It can be difficult to decide what type of loan you need but the above advice can help sort things out. Figure out if you qualify for government-insured loans, browse the many choices of the private mortgage market, and choose the best type of rate. With some research and question asking you’ll get the perfect type of loan for your situation.