FHA vs VA vs Conventional Loans: Which Mortgage Is Right for You?

Choosing the right mortgage can save you tens of thousands of dollars over the life of your loan. But with FHA, VA, conventional, and other loan types available, how do you know which one is best for your situation?

This comprehensive guide breaks down the three most common mortgage types, compares them side-by-side, and helps you determine which option gives you the best deal based on your credit, down payment, and homebuying goals.

1. Quick Overview: The Three Main Mortgage Types

Before diving into details, here's a high-level snapshot of each loan type:

FHA Loans (Federal Housing Administration)

Best for: First-time buyers, lower credit scores (580-680), limited down payment savings

Key features:

• 3.5% minimum down payment
• Credit scores as low as 580 accepted
• Backed by government insurance
• Mortgage insurance required for life of loan (if less than 10% down)

VA Loans (Veterans Affairs)

Best for: Active military, veterans, and eligible spouses

Key features:

• $0 down payment
• No mortgage insurance required
• Competitive interest rates
• Backed by VA guarantee
• Only available to those who've served

Conventional Loans

Best for: Good credit (680+), stable income, able to put down 5-20%

Key features:

• Not government-backed
• Flexible terms and property types
• PMI can be removed once you hit 20% equity
• Stricter credit and income requirements

The bottom line upfront: If you qualify for a VA loan, it's almost always your best option. Between FHA and conventional, the answer depends on your credit score, down payment, and how long you plan to keep the mortgage.

2. Eligibility Requirements: Can You Qualify?

Let's compare the baseline requirements for each loan type:

Credit Score Requirements

| Loan Type | Minimum Credit Score | Ideal Credit Score | |-----------|---------------------|-------------------| | FHA | 580 (3.5% down) or 500 (10% down) | 620+ | | VA | No official minimum (lenders typically want 580-620) | 640+ | | Conventional | 620 minimum (most lenders want 640+) | 720+ |

Winner for low credit: FHA loans accept the lowest credit scores. If your score is 580-680, FHA is likely your only option.

What this means: If you're rebuilding credit after bankruptcy, foreclosure, or other financial setbacks, FHA loans offer the fastest path back to homeownership.

Down Payment Requirements

| Loan Type | Minimum Down Payment | Typical Down Payment | |-----------|---------------------|---------------------| | FHA | 3.5% (credit 580+) or 10% (credit 500-579) | 3.5% | | VA | 0% (no down payment required) | 0% | | Conventional | 3% (first-time) or 5% (repeat buyers) | 10-20% |

Winner for low down payment: VA loans require zero down. FHA loans come in second with just 3.5% down.

On a $300,000 home:

• FHA: $10,500 down payment
• VA: $0 down payment
• Conventional (3%): $9,000 down payment
• Conventional (20%): $60,000 down payment

Important note: While conventional loans can go as low as 3% down, you'll pay mortgage insurance until you reach 20% equity. The lower your down payment, the higher your monthly cost.

Debt-to-Income Ratio Limits

| Loan Type | Maximum DTI Ratio | Notes | |-----------|------------------|-------| | FHA | 43% (up to 50% with compensating factors) | More flexible with high DTI | | VA | 41% guideline (can go higher) | Very flexible with residual income method | | Conventional | 43% (up to 50% with strong credit) | Stricter interpretation |

Winner for high debt: FHA and VA loans are most forgiving with higher debt-to-income ratios. Conventional loans are strictest.

DTI calculation example:

• Gross monthly income: $7,000
• Monthly debts (car, credit cards, student loans): $1,500
• Maximum housing payment at 43% DTI: $3,010 - $1,500 = $1,510

Employment and Income Requirements

FHA:

• 2 years steady employment (same employer or field)
• Verifiable income through pay stubs, W-2s, tax returns
• Self-employed accepted with 2 years tax returns

VA:

• 2 years employment history (some flexibility for military transitions)
• Current income must be stable and likely to continue
• Self-employed accepted with 2 years tax returns

Conventional:

• 2 years employment history required
• Stricter scrutiny of income stability
• Self-employed borrowers face more documentation requirements

Winner for flexible income: VA loans are most understanding of military career transitions and varied income sources.

Service Requirements (VA Only)

To qualify for VA loans, you must meet service requirements:

Active duty: 90 consecutive days during wartime, 181 days during peacetime

Veterans: Generally need 90 days of active service during wartime or 181 days during peacetime with honorable discharge

National Guard/Reserves: 6 years of service

Surviving spouses: May qualify if spouse died in service or from service-connected disability

Get your COE (Certificate of Eligibility) from VA.gov to verify your eligibility.

3. Mortgage Insurance: The Hidden Cost

This is where loans differ dramatically and where long-term costs add up significantly.

FHA Mortgage Insurance

Upfront premium: 1.75% of loan amount (rolled into loan)

• On $300,000 loan: $5,250 added to principal

Annual premium: 0.45% - 1.05% of loan amount (paid monthly)

• On $300,000 loan: $1,350 - $3,150 annually ($112-262/month)
• Exact rate depends on loan term and down payment

Duration:

• Less than 10% down: MIP for entire loan life (30 years)
• 10%+ down: MIP for 11 years
• Only way to remove: Refinance to conventional loan once you have 20% equity

30-year cost on $300,000 loan: Approximately $60,000+ in mortgage insurance payments if you never refinance

VA Funding Fee

Upfront fee: 1.4% - 3.6% of loan amount (varies by service type, down payment, first-time vs subsequent use)

Typical first-time buyer: 2.15% with $0 down

• On $300,000 loan: $6,450 (rolled into loan)

No monthly mortgage insurance: This is VA's huge advantage

Exemptions: Veterans with service-connected disabilities pay no funding fee

Subsequent use: Funding fee increases to 3.3% for second VA loan

Total cost: One-time fee only—no ongoing monthly charges

Conventional PMI (Private Mortgage Insurance)

Monthly premium: 0.3% - 1.5% of loan amount annually

• On $300,000 loan with 5% down: ~$150-200/month

Rate factors:

• Credit score (higher score = lower PMI)
• Down payment amount (more down = lower PMI)
• Loan type (PMI is cheaper with higher credit)

Duration:

• Automatic removal at 78% loan-to-value (22% equity)
• Borrower-requested removal at 80% LTV (20% equity)
• Can be removed through appreciation + principal paydown

Total cost: Varies significantly based on how quickly you reach 20% equity

Side-by-Side Insurance Comparison

$300,000 home, 30-year loan:

| Loan Type | Down Payment | Upfront Cost | Monthly Cost | Years Paid | Total Cost | |-----------|-------------|--------------|--------------|------------|-----------| | FHA | 3.5% ($10,500) | $5,250 | $180 | 30 years | ~$70,000 | | VA | $0 | $6,450 | $0 | N/A | $6,450 | | Conventional | 5% ($15,000) | $0 | $165 | ~8 years* | ~$15,800 |

*Assumes property appreciates 3% annually and principal is paid down normally

Winner: VA loans by a landslide—no monthly mortgage insurance saves tens of thousands.

Runner-up: Conventional loans with 10-20% down—PMI is removable, keeping long-term costs down.

4. Interest Rates and Total Loan Costs

Interest rates vary based on loan type, credit score, down payment, and market conditions.

Typical Rate Differences

As of late 2024/early 2025:

| Loan Type | Average Rate* | Rate Range | |-----------|--------------|-----------| | FHA | 6.75% | 6.5% - 7.25% | | VA | 6.50% | 6.25% - 6.875% | | Conventional | 6.875% | 6.5% - 7.5% |

*Rates fluctuate daily and depend on credit score, down payment, and other factors

Why VA rates are lowest: Government backing reduces lender risk, allowing them to offer better rates.

Why conventional rates vary most: Credit score dramatically impacts conventional rates. Borrowers with 760+ scores get the best rates; those with 620-680 scores pay significantly more.

Total Interest Paid Over 30 Years

Let's compare on a $300,000 loan at average rates:

| Loan Type | Interest Rate | Monthly Payment (P&I) | Total Interest Paid | |-----------|--------------|---------------------|-------------------| | FHA (6.75%) | 6.75% | $1,946 | $400,560 | | VA (6.50%) | 6.50% | $1,896 | $382,560 | | Conventional (6.875%) | 6.875% | $1,971 | $409,560 |

Over 30 years, VA saves:

• $18,000 vs FHA
• $27,000 vs Conventional

These numbers don't include mortgage insurance—when you add that, VA's advantage grows even larger.

True Cost Comparison (Including All Fees)

Let's look at total monthly payment including insurance on $300,000 loan:

| Loan Type | Principal + Interest | Mortgage Insurance | Total Monthly | Total After 5 Years | |-----------|-------------------|-------------------|--------------|-------------------| | FHA | $1,946 | $180 | $2,126 | $127,560 | | VA | $1,896 | $0 | $1,896 | $113,760 | | Conventional | $1,971 | $165 | $2,136 | $128,160 |

5-year savings with VA loan:

• $13,800 vs FHA
• $14,400 vs Conventional

Over 30 years, the gap widens dramatically since FHA insurance never goes away.

5. Property Requirements and Loan Limits

Each loan type has specific property requirements and maximum loan amounts.

FHA Property Requirements

Property types allowed:

• Single-family homes
• Multi-unit properties (2-4 units, must occupy one)
• FHA-approved condos
• Manufactured homes (meeting HUD standards)

Property standards:

• Must meet minimum property standards
• Must pass FHA appraisal
• Repairs may be required before closing
• Cannot have health/safety hazards

Loan limits (2025):

• Low-cost areas: $498,257
• High-cost areas: up to $1,149,825
• Varies by county

VA Property Requirements

Property types allowed:

• Single-family homes
• Multi-unit properties (2-4 units, must occupy one)
• Condos (must be VA-approved)
• New construction
• Manufactured homes on permanent foundations

Property standards:

• Must meet VA Minimum Property Requirements (MPRs)
• Must pass VA appraisal
• Must be move-in ready
• Must be primary residence

Loan limits:

• No loan limit for veterans with full entitlement as of 2020
• Can buy homes of any price with $0 down (subject to lender approval based on income)

Conventional Property Requirements

Property types allowed:

• Single-family homes
• Multi-unit properties (2-4 units)
• Condos (any legally established condo)
• Co-ops
• Vacation homes (with higher down payment)
• Investment properties (25% down)

Property standards:

• Must meet lender's appraisal requirements
• More flexible than FHA/VA
• Cosmetic issues rarely prevent approval

Loan limits (2025):

• Conforming loan limit: $806,500 (most areas)
• High-cost areas: up to $1,209,750
• Above these amounts = Jumbo loans (different requirements)

Winner for flexibility: Conventional loans accept the widest variety of properties and have fewest restrictions.

6. Closing Costs and Seller Concessions

How much you'll pay at closing and what sellers can contribute varies by loan type.

Typical Closing Costs

All loan types generally include:

• Origination fees (0.5% - 1% of loan)
• Appraisal ($400-700)
• Credit report ($25-100)
• Title insurance ($1,000-3,000)
• Attorney fees ($500-1,500)
• Recording fees ($50-250)
• Prepaid items (taxes, insurance)

Total closing costs typically run 2-6% of purchase price

Seller Concessions (How Much Sellers Can Pay)

| Loan Type | Maximum Seller Concessions | What This Means | |-----------|--------------------------|----------------| | FHA | 6% of purchase price | Sellers can pay up to 6% toward your closing costs | | VA | 4% of purchase price | Sellers can pay up to 4% toward your closing costs | | Conventional | 3% - 9% depending on down payment | 3% (under 10% down), 6% (10-25% down), 9% (25%+ down) |

Winner: FHA loans allow highest seller contributions, helpful when you have limited cash for closing.

Why this matters: If you're stretching to afford the down payment, seller concessions can cover most or all of your closing costs, reducing cash needed at closing.

Down Payment Gifts and Grants

FHA:

• ✅ 100% of down payment can be gifted by family
• ✅ Down payment assistance programs accepted
• ✅ Employer assistance programs allowed

VA:

• ✅ 100% of costs can be gifted (though $0 down required)
• ✅ Can be used for closing costs
• ✅ No down payment needed, but gifts help with costs

Conventional:

• ✅ Gifts accepted from family
• ⚠️ If down payment under 20%, borrower must contribute at least 5% of own funds
• ✅ Down payment assistance programs accepted (depending on program)

Winner: VA and FHA are most flexible with gift funds and down payment assistance.

7. Decision Matrix: Which Loan Should You Choose?

Use this decision tree to identify your best option:

Choose VA Loan If:

✅ You're active military, a veteran, or eligible spouse ✅ You want $0 down payment ✅ You want no monthly mortgage insurance ✅ You qualify for VA lending

There's virtually no reason to choose FHA or conventional if you qualify for VA financing. The savings are massive.

Choose FHA Loan If:

✅ Your credit score is 580-680 ✅ You only have 3.5% saved for down payment ✅ You don't qualify for VA ✅ You have higher debt-to-income ratios ✅ You plan to refinance to conventional within 3-5 years

FHA is your access pass to homeownership when conventional lenders won't approve you.

Choose Conventional Loan If:

✅ Your credit score is 700+ ✅ You can put down 10-20% ✅ You plan to keep the loan 10+ years ✅ You're buying a property that's not FHA/VA approved ✅ You want to remove mortgage insurance eventually

Conventional loans offer the best long-term value for borrowers with strong credit and down payment funds.

8. Real-World Scenarios: Which Loan Wins?

Let's walk through common buyer situations:

Scenario 1: First-Time Buyer, Limited Savings

Profile:

• Credit score: 640
• Down payment saved: $12,000
• Monthly income: $6,000
• Monthly debts: $800
• Target home price: $280,000

Analysis:

FHA: ✅ Qualifies easily

• 3.5% down: $9,800
• Closing costs: ~$8,400 (could negotiate seller credit)
• Monthly payment (including MIP): ~$2,150

Conventional: ⚠️ Possible but expensive

• 3% down: $8,400
• Credit score means higher interest rate
• Monthly payment (including PMI): ~$2,100
• PMI removable after gaining equity

Winner: FHA is safer bet with lower credit score, though conventional might work if buyer has stable income and can qualify at the higher rate.

Scenario 2: Military Veteran, Strong Credit

Profile:

• Credit score: 720
• Down payment saved: $20,000
• Monthly income: $8,000
• Monthly debts: $600
• Target home price: $350,000
• Veteran with VA eligibility

Analysis:

VA: ✅✅✅ Clear winner

• $0 down required (can save $20K for emergencies/improvements)
• No monthly mortgage insurance
• Best interest rates
• Monthly payment: ~$2,210

FHA: No reason to choose

• Requires down payment
• Requires mortgage insurance
• Higher long-term cost

Conventional: No reason to choose

• Requires down payment
• Requires PMI until 20% equity
• Higher rates than VA

Winner: VA loan saves this buyer over $60,000 in mortgage insurance over life of loan.

Scenario 3: Strong Credit, Significant Down Payment

Profile:

• Credit score: 760
• Down payment saved: $80,000
• Monthly income: $10,000
• Monthly debts: $700
• Target home price: $400,000

Analysis:

Conventional: ✅✅ Best choice

• 20% down: $80,000 (no PMI required)
• Excellent credit score = best rates
• Most flexible for future refinancing
• Monthly payment: ~$2,010

FHA: Not optimal

• Unnecessarily restrictive property standards
• Would pay mortgage insurance despite large down payment
• Loan limit might be issue depending on location

Winner: Conventional loan with 20% down eliminates PMI and offers best long-term value for well-qualified buyer.

Scenario 4: Recovering Credit After Hardship

Profile:

• Credit score: 590
• Down payment saved: $15,000
• Monthly income: $5,500
• Monthly debts: $900
• Target home price: $250,000
• Bankruptcy discharged 3 years ago

Analysis:

FHA: ✅ Only realistic option

• Accepts credit score of 580+
• Bankruptcy waiting period: 2 years (already met)
• 3.5% down: $8,750
• Monthly payment (including MIP): ~$1,900

Conventional: ❌ Not available

• Minimum credit 620
• Bankruptcy waiting period: 4 years (not met)
• Wouldn't qualify

Winner: FHA is the only path to homeownership right now. After credit improves, consider refinancing to conventional.

9. Special Loan Programs to Know

Beyond the big three, these specialized programs help specific buyer groups:

FHA 203k Renovation Loans

What it is: Combines purchase financing and renovation costs into one loan

Best for: Buyers wanting to purchase and renovate simultaneously

Benefit: Borrow based on home's after-repair value, not current condition

Example: Buy $200,000 fixer-upper, borrow $250,000 total to fund $50,000 in renovations

VA Interest Rate Reduction Refinance Loan (IRRRL)

What it is: Streamlined refinance for existing VA loan holders

Best for: VA borrowers wanting to lower their rate

Benefit: Minimal documentation, no appraisal required, no out-of-pocket costs

Conventional HomeReady and Home Possible

What it is: Low down payment conventional loans (3% down) for low-to-moderate income buyers

Best for: First-time buyers with good credit but limited income

Benefit: Lower PMI rates than standard conventional, allows boarder income

USDA Rural Development Loans

What it is: $0 down payment loans for rural and suburban properties

Best for: Buyers in qualifying areas outside major cities

Benefit: No down payment required, low mortgage insurance

Income limits: Must be below area median income

10. How to Apply and Get Approved

Ready to move forward? Here's your action plan:

Step 1: Check Your Credit

Pull your free credit report from AnnualCreditReport.com and check your FICO score. If your score needs improvement:

• Pay down credit card balances below 30% of limits
• Dispute any errors
• Avoid opening new accounts
• Pay all bills on time for 3-6 months

Step 2: Calculate Your Budget

Determine how much home you can afford:

Use the 28/36 rule:

• Housing costs ≤ 28% of gross monthly income
• Total debts ≤ 36% of gross monthly income

Example: $7,000 monthly income

• Maximum housing payment: $1,960
• Maximum total debt payments: $2,520

Step 3: Gather Documentation

Prepare required documents before applying:

• Last 2 years tax returns
• Recent pay stubs (30 days)
• 2 months bank statements
• Photo ID and Social Security number
• List of debts and monthly payments
• Employment history (2 years)
• VA Certificate of Eligibility (if applicable)

Step 4: Get Pre-Approved with Multiple Lenders

Apply with 2-3 lenders offering your target loan type:

• Compare interest rates
• Compare closing costs and fees
• Evaluate lender responsiveness
• Check customer reviews

Pre-approval timeline: 3-5 business days typically

Step 5: Choose Your Loan Type

Based on your pre-approvals, select the loan offering:

• Lowest total monthly payment
• Best long-term value
• Most flexibility for your situation
• Comfortable qualification requirements

Step 6: House Hunt and Close

With pre-approval in hand:

• Make offers with confidence
• Complete required appraisal and inspections
• Provide any additional documentation lender requests
• Close on your new home!

Final Verdict: Which Loan Is Best?

If you're a veteran or active military: VA loans are unbeatable—$0 down, no mortgage insurance, best rates. Always choose VA if eligible.

If you have good credit (700+) and 10-20% down: Conventional loans offer the best long-term value with removable PMI and flexible terms.

If you have lower credit (580-680) or limited savings: FHA loans provide access to homeownership when other options aren't available.

The smartest strategy:

1. Check if you qualify for VA (if applicable)
2. Compare FHA and conventional pre-approvals
3. Calculate total costs over expected homeownership period
4. Choose the loan with lowest total cost based on your timeline

Remember, you're not locked into your initial loan forever. Many buyers start with FHA financing, build equity over 3-5 years, then refinance to conventional to eliminate mortgage insurance and reduce monthly payments.

The loan you choose today shapes your financial future for years to come. Take time to understand your options, run the numbers, and select the mortgage that positions you for long-term success.

Compare loan options side-by-side: Use our FHA Loan Calculator and Conventional Loan Calculator to see actual monthly payments and costs for each loan type based on your situation.

Ready to explore your mortgage options? EDP Realty's experienced team can connect you with trusted lenders offering competitive rates on FHA, VA, and conventional loans. Contact us today to start your pre-approval process and find the perfect financing for your dream home.

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