Different Mortgage Loan Types Explained
Conventional, FHA, USDA, VA: four mortgage types with very different rules, costs, and trade-offs that can make or break your path to homeownership. Knowing which one fits your situation starts with understanding what sets them apart.
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Shopping for a house is complicated, especially when you start hearing terms like conventional, FHA, USDA, and VA. While all of these are types of mortgage loans, they have different requirements, costs, advantages, and details. The right mortgage for you can depend on a host of factors, like your credit score, income, and how much money you have for a down payment. Here are some of the most common mortgage loan types and descriptions of each.
1. Conventional Loans
A conventional mortgage is a home loan that isn’t insured or guaranteed by a federal government agency. It’s one of the most common options and tends to work well for borrowers with good credit and stable finances. You don’t need a 20% down payment to get one. Some conventional programs allow buyers to put down as little as 3%.
If you put down less than 20%, you’ll have to pay private mortgage insurance, often referred to as PMI. But one major advantage of a conventional loan is that PMI can be removed once you have enough equity in the house.
Conventional loans can have stricter credit and financial requirements than government-backed loans. But for those who qualify, they can be an excellent choice.
2. FHA Loans
FHA loans are mortgages insured by the Federal Housing Administration. They’re designed to make homeownership accessible to a larger pool of borrowers. Because of this, they tend to have more flexible credit requirements than conventional loans. One advantage is that borrowers can put down as little as 3.5%. For those without a huge amount of cash on hand, that can make an FHA loan quite appealing.
The downside is mortgage insurance. Like with conventional loans under the 20% down payment mark, FHA borrowers have to pay mortgage insurance premiums, or MIP. But it differs from conventional loans in one important way: for borrowers who put down less than 10%, the annual mortgage insurance lasts for the life of the loan. (Borrowers who put down at least 10% generally pay it for 11 years.)
Additionally, FHA borrowers will have to pay both an upfront mortgage insurance premium and the annual premium that’s divided over monthly payments. If you know you will refinance, this might not be much of a deterrent. But refinancing is never guaranteed.
3. USDA Loans
USDA loans can be a solid option for people buying in eligible rural and some suburban areas. They’re backed by the U.S. Department of Agriculture. One of their biggest advantages is being able to buy with no down payment. However, the qualifications for this loan are strict, and both the borrower and property have to meet the requirements. USDA loans have household income limits, which means income from certain adult household members can count toward eligibility whether or not they will be borrowers on the loan. And the home must be located in an eligible area. Borrowers also have to meet the program’s credit, income, debt, and other requirements. USDA loans include an upfront guarantee fee and an annual fee, although the ability to buy with no down payment can still make them highly attractive.
4. VA Loans
VA loans are available to eligible veterans, active-duty service members, and certain surviving spouses. They’re guaranteed by the U.S. Department of Veterans Affairs. A VA mortgage can have some of the best terms. Borrowers can buy a house with no down payment, and these loans don’t require monthly private mortgage insurance. Interest rates can also be better than with other loans. There is usually a VA funding fee, although certain borrowers are exempt. Obviously, VA loans aren’t available to the general public.
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