Government Home Loans: FHA vs. VA vs. USDA vs. Conventional Mortgages
Conventional vs. FHA vs. VA vs. USDA: Know the Difference
Coming up with the funds to buy a house can be tricky, there’s no doubt about it. But it’s not as difficult as you might be led to believe, what with all the home loan options at your disposal.
Government home loans, in particular, offer a viable alternative to conventional mortgages, helping countless families buy a house they can call their own. There are a few major government loan programs to choose from, each with their own express purpose. Let’s break down what each of these government home loans has to offer so you can choose the right one for you.
Three types of government housing loans
While the federal government offers many different loans, including student loans and small business loans, there are three major federal home loan programs you really need to know.
3 main government home loans
- FHA loans
- VA loans
- USDA loans
Odds are you won’t be able to qualify for all three programs since they cater to very distinct groups of borrowers. But, you may be able to find at least one that will fit your needs and get you started on the path toward homeownership.
Federal Housing Administration (FHA) loans
FHA mortgages are loans that are insured by the Federal Housing Administration (FHA) and feature flexible down payment options, credit score requirements and other loan terms. In many cases, FHA loans appeal to individuals who lack the strong financial circumstances to qualify for a conventional mortgage.
Now, the FHA doesn’t actually extend the loan to you directly — you still need to go through an FHA-approved lender to receive financing. But qualifying for an FHA loan has a lot of perks.
For one, these types of mortgages have pretty flexible eligibility requirements, especially when it comes to your credit score and down payment. In fact, FHA loans have down payment options as low as 3.5% of the total purchase price. And in some cases, you may be eligible for an FHA mortgage even with a credit score ranging between 580 and 600.
Although the FHA does not provide these mortgages itself, by insuring them, the government agency decreases the amount of risk that lenders take on when extending loans to borrowers with less than ideal qualifications. As such, FHA loans encourage mortgage providers to issue loans to applicants they might otherwise reject.
One caveat to consider is that FHA loans require mortgage insurance. And unlike the private mortgage insurance (PMI) you might need with a conventional mortgage, FHA’s insurance extends across the entire life of the loan.
Veterans Affairs (VA) loans
FHA loans are available to anyone who can meet the minimum eligibility requirements, regardless of your station in life. That’s not the case with the home loans provided through the Department of Veterans Affairs (VA). Only active or former members of the armed forces (as well as their spouses) can receive a VA loan. There are also minimum service requirements that need to be met to be eligible. Check out the VA’s list of eligibility standards to see if you qualify.
If you look past the more exclusive qualification requirements, you’ll find that VA loans have a ton to offer service members and their families. Even compared with FHA loans’ flexible down payment options, VA loans come out looking very good.
How good? Try zero down payment. Now, you will need to pay a VA funding fee and other closing costs, but that expense can be stretched out across your monthly mortgage payments rather than paid as a lump sum.
United States Department of Agriculture (USDA) loans
Similar to VA loans, home loans offered through the United States Department of Agriculture (USDA) are highly specialized and tailored to the needs of a very distinct community. In this case, that would be rural denizens with low-to-moderate income.
Because of the department’s title, people often think USDA loans are exclusive to farming communities, but that’s not the case at all. The land simply needs to be deemed “rural” by the USDA, and that’s a pretty low bar to clear. Take a look at the USDA’s property eligibility map to see if your area qualifies for this type of loan.
The USDA offers a few different varieties of home loans, but by far the most popular one is the Single Family Home Loan Guarantees. Like FHA’s offerings, USDA loans come with a litany of eligibility requirements for borrowers to meet. Those include criteria like credit score, debt-to-income (DTI) ratio and monthly mortgage payment.
How do government loans work in real estate?
The most important detail to keep in mind with any of these government mortgage loans is that the federal government is not supplying financing itself. You need to go through a private lender just as you would with any conventional mortgage. In each case, the government agency will facilitate the lending process in some regard, either insuring the mortgage or guaranteeing repayment in the event of default.
Keep in mind that only approved lenders can offer these kinds of home loans. And just because a mortgage provider has one kind of government loan offering doesn’t mean they’ll support all three discussed here. If you’re interested in a government home loan, your first order of business isn’t to reach out to the FHA, VA or USDA; instead, you should ask your lender if they offer the type of mortgage you’re looking for.
Comparing the 3 government housing loan programs
No matter who you are, there’s a good chance you’ll find something to like in at least one of these government loan programs. You’ll come across different eligibility requirements, financing options and loan terms with each one, so let’s take a look at how they stack up.
Special eligibility requirements
Active and former service members (and spouses)
Minimum credit score
Down payment requirement
Options as low as 3.5%
Loan types supported
Fixed rate loans
Fixed rate loans
15- and 30-year fixed rate loans only
Property types supported
Single-family houses, condos and 2-to-4-unit properties
Single-family houses and condos
Single-family houses and condos
Government loans vs. conventional loans
Conventional loans — mortgages not backed by the federal government — often present less flexibility in terms of financing compared with government loans. That’s especially true when it comes to down payment requirements and application qualifications. For instance, it may be difficult to find a mortgage provider willing to extend a home loan to someone who can only put forward 3% of the purchase price as a down payment — that is, unless they support Fannie Mae and Freddie Mac loan programs.
Credit score requirements vary as well. Lenders don’t tend to set a hard minimum on acceptable credit scores — at least not publicly. But generally speaking, government loan programs are a bit more lenient when it comes to a borrower’s credit history.
Does that mean you should always choose a government home loan over a conventional mortgage? Not at all. There are usually a wider variety of loan options to choose from going the conventional route. Adjustable rate mortgages, jumbo loans, interest-only mortgages and 40-year fixed rate loans are all potentially on the table with a conventional mortgage.
Remember too that each government loan program is designed with specific demographics in mind. Even FHA loans, which are available to anyone who meets the basic qualifications, are first and foremost meant to assist people who otherwise wouldn’t qualify for a conventional mortgage.
Like we said earlier, though, there’s a tradeoff to consider. FHA loan users need to pay a mortgage insurance premium (MIP). And unlike the private mortgage insurance that may be tacked onto a conventional loan, MIP never goes away. You would need to refinance to another type of mortgage to remove it from your loan.
Choosing the right government loan for you
Given all of these differences between your government housing loan options, how do you choose the right one for your circumstances? While people from all walks of life qualify for FHA, VA and USDA loans, each mortgage program is better suited for certain groups:
Which government loan is the right fit?
- FHA loans: Homebuyers who may not qualify for conventional mortgages
- VA loans: Active or former service members as well as military spouses
- USDA loans: Individuals living in rural communities
Still not sure which government housing mortgage makes the most sense for your situation? Here are a few questions you can ask yourself to help narrow down your choices:
- Am I an active or former member of the armed forces? If not, right away you can remove VA loans from consideration.
- Is my home located in a rural area? People living in more urban and suburban neighborhoods won’t qualify for a USDA loan, so you can scratch that one if that’s the case.
- How much can I afford for a down payment? FHA loans offer plenty of flexibility with their down payment options, but you will need to put up some money up front. That may not be the case with either VA or USDA loans.
- How strong is my credit score? You’ll need a 620 credit score at minimum to qualify for USDA loans. FHA and VA programs tend to be a bit more lenient on credit history.
- Which loan offers the lowest interest rate? All three government loan programs tend to offer lower interest rates than conventional mortgages, but among them, VA might have a slight edge. Mortgage rates constantly fluctuate, no matter what type of home loan you’re considering. So, be sure to take a look at the latest interest rates before making a decision.
Let’s say you qualify for FHA, VA and USDA loans — which program do you go with then? While each one has its advantages, VA loans frequently come out ahead when you consider the 0% down payment options and lack of mortgage insurance. Again, keep in mind that with an FHA mortgage, your MIP will run the entire length of your loan.
And, yes, you will need to pay a VA funding fee, but unlike a traditional down payment, you can spread that expense out across your monthly mortgage payments.
That doesn’t mean you should always opt for a government loan over a conventional mortgage, though. If you qualify for a 30-year fixed rate mortgage and can swing the cost of a down payment, then it may make more sense to skip government programs entirely and use a conventional mortgage.
Prospective homebuyers have three main government home loan programs to consider: FHA, VA and USDA loans. Each one operates through a different government agency and supports fairly distinct groups of borrowers. Depending on your specific circumstances, one government mortgage program probably makes much more sense over the others.
It’s very important to remember that the federal government does not extend home loans itself. These agencies simply work with mortgage lenders to lower barriers to homeownership. As such, mortgage providers may have their own eligibility requirements to qualify for a government home loan. That includes credit score, down payment, DTI and other criteria.
All the more reason to carefully vet your mortgage options and choose a lender who will work with you to find the right home loan to suit your needs. Take your time and make the best decision for you and your family.
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