Once you have decided to become a homeowner, your first step is deciding which loan is best for you. FHA, VA, and conventional loans have some similarities, but they are as different from each other, as day and night.
FHA Loans.
A Federal Housing Administration (FHA) loan is a mortgage insured by the Federal Housing Administration. This loan is particular in that if you aren’t able to meet the mortgage payment, and your property doesn’t fully compensate the debt through a foreclosure sale, the FHA will reimburse the creditor for the loss. This reduces the lender’s risk, consequentially giving the borrower a low down-payment, going as low as 3.5% of the purchase price.
This loan is designed for borrowers with low to moderate incomes. The borrower must have a FICO credit score no lower than 500, making this loan one of the easiest to qualify for. However, depending on a given region, FHA loans have a maximum loan limit.
VA Loans.
Just like FHA loans, the Veterans Administration (VA) loan is also insured if the borrower can’t meet the mortgage payment, and the property doesn’t compensate the debt. But one of the biggest benefits from the VA loan is that it can be guaranteed with no money down and there is no private mortgage insurance requirement. Still, borrowers have to pay a funding fee—a one-time charge between 1.25% and 3.3% of the loan amount.
To qualify for a VA loan, one must either be a veteran, a reservist/national guard member, or a current member of the U.S. armed forces. An eligible surviving spouse can also benefit from the VA loan.
Conventional Loans.
Conventional loans, like the name suggests, is a loan that is not insured or guaranteed by the federal government. This means that unlike FHA or VA loans, the lender has no guarantees over the loan that is given if the borrower can’t meet the mortgage payment, and the property doesn’t compensate the debt.
To compensate for the lack of government insurance, the lender requires a Private Mortgage Insurance (PMI) if the borrower makes less than a 20% down payment on the property. This represents an extra payment the borrower has to bear.
There are two types of conventional mortgages: conforming and nonconforming loans. A conventional conforming mortgage loan follows the guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and is available to everyone, but they are more difficult to qualify for than FHA and VA loans.
You are eligible for a conventional conforming loan when you have a steady income, have a good FICO score and be able to afford the down payment. These requirements are stricter than the FHA and VA mortgages because conventional loans represent a higher risk for lenders.
On the other hand, the nonconforming conventional loan doesn’t meet Fannie and Freddie’s purchase standards. Other types of conventional loans —that are not conforming— include jumbo loans, portfolio loans, and subprime loans.
FHA Standards as of 2019.
Even though almost all FHA loans get approved by an automated system, only a few borrowers’ applications are manually reviewed based on FHA guidelines. By 2016, it wasn’t required for borrowers with credit scores under 620 and debt-to-income ratios above 43% to be manually reviewed. Nonetheless, as of March 2019, the agency informed lenders that the requirements for FHA-insured loans became more controlled because too many risky loans were being made. This means that nearly 50,000 loans per year (5% of the total mortgages that the FHA insures on an annual basis) will undergo a more rigorous review.
You will also have to pay a Mortgage Insurance Premium or “MIP” 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 fail to pay.
If you aren’t quite sure which mortgage loan is the best for you, or you would like to seek advice from experts, consider contacting a real estate attorney, a mortgage lender or a HUD-approved housing counselor.