Conventional vs FHA vs VA Loans
Conventional vs FHA vs VA Loans
Three mortgage types dominate the U.S. market, each with different eligibility rules, insurance costs, and flexibility. Choosing the right one is often decided for you by income, military status, and down payment—but understanding the trade-offs prevents expensive mistakes.
Key takeaways
- Conventional loans require 3–20% down, have no PMI if 20%+ down, and allow flexible occupancy and property types.
- FHA loans require 3.5% down but carry permanent mortgage insurance if down payment is under 10%, and enforce strict property standards.
- VA loans (available to eligible military) require 0% down, no PMI, and offer the lowest closing costs—but carry a VA funding fee and have occupancy restrictions.
- Mortgage insurance costs (PMI or VA funding fee) vary widely; calculator shopping is essential.
- Property condition requirements vary: conventional is most flexible, FHA is moderate, VA is strictest on defects.
Conventional loans
A conventional loan is any mortgage not backed by a government agency (FHA, VA, USDA). Fannie Mae and Freddie Mac (government-sponsored enterprises) purchase most conventional loans in the secondary market, setting underwriting standards.
Down payment: 3–20% (or more).
Credit score: Typically 620+ minimum, but 740+ gets better rates. Below 660, approval is rare.
PMI: Required if LTV above 80% (down payment under 20%). PMI is 0.5–2% annually depending on credit score and LTV. PMI is removable once you hit 80% LTV through principal reduction or home appreciation.
Property requirements: Single-family homes, condos (if condo association is financially sound), townhouses, and multi-unit properties (up to 4 units). Properties must meet basic safety standards, but inspection and appraisal are less stringent than FHA.
Occupancy: Must be owner-occupied (primary residence), or investor/second home (different rates apply).
Flexibility: Most flexible. Rates are usually lowest for conventional loans, DTI can go to 43%, and recent credit issues (bankruptcy, foreclosure) recover faster than with FHA.
Closing costs: Typically 2–5% of loan amount for all fees (appraisal, underwriting, title, escrow).
Example: $350,000 home, 10% down, $315,000 loan at 6% over 30 years.
- Monthly P&I: $1,892
- PMI (0.75%): $197
- Total: $2,089/month
- PMI drops when principal reaches $252,000 (80% of original home value)—roughly 10 years with appreciation helping.
FHA loans
FHA (Federal Housing Administration) loans are government-backed mortgages designed for first-time buyers and borrowers with lower credit scores.
Down payment: Minimum 3.5% (debt-to-income and credit-dependent).
Credit score: 580–600 minimum (FHA is lenient compared to conventional). Scores under 620 face surcharges.
Mortgage Insurance: FHA has two insurance components:
- Upfront Mortgage Insurance Premium (UFMIP): 1.75% of the loan, added to the loan balance.
- Annual Mortgage Insurance Premium (AMIP): 0.55–0.80% annually (depends on LTV and loan term).
Crucially: FHA insurance is permanent if down payment under 10%. This is a massive cost disadvantage versus conventional.
Example: $350,000 home, 3.5% down ($12,250 down).
- Loan amount before UFMIP: $337,750
- UFMIP (1.75%): $5,910 (added to loan)
- New loan balance: $343,660
- Monthly P&I: $2,062
- AMIP (0.80%): $229/month
- Total: $2,291/month
- PMI is permanent unless you refinance to conventional (which requires 20% equity).
Property requirements: FHA is strict. Property must be a one-to-four unit owner-occupied dwelling in good condition. No major structural defects, missing utilities, or hazardous conditions allowed. Appraisal is thorough; many older homes, townhouses in poor repair, and condos with financial issues fail FHA appraisal.
Occupancy: Owner-occupied only (primary residence). Investment properties and second homes are not eligible.
Debt-to-income: Can go to 50% back-end DTI with compensating factors (high reserves, lower front-end ratio).
Pros: Lower credit score required, lowest upfront down payment, easier qualification for self-employed.
Cons: Permanent PMI (under 10% down), stricter property standards, appraisal delays, rate is often 0.25–0.5% higher than conventional.
When FHA makes sense: You're a first-time buyer with poor credit (under 640) and less than $35,000 saved for a $350,000 home purchase. FHA lets you buy sooner. But if you can scrape together 20% down, conventional is cheaper.
VA loans
VA loans are available to eligible service members, veterans, and surviving spouses. They're the most borrower-friendly in the market.
Down payment: 0% (no down payment required).
Credit score: No minimum stated, but 620+ typical. Veterans with service-connected disability or other hardship can qualify below 600.
Funding fee: One-time VA funding fee (1.25–3.6% of the loan) paid upfront or rolled into the loan. This replaces PMI—it's not insurance but a fee to cover VA costs.
Example: $350,000 home, $0 down, $350,000 loan at 6% over 30 years.
- Funding fee (2.3% for first-time use): $8,050 (rolled into loan, new balance $358,050)
- Monthly P&I on $358,050: $2,148
- No PMI or AMIP (because VA funding fee covers insurance-like protection)
Property requirements: Single-family homes primarily. Condos and multi-unit (up to 4 units if owner-occupied) allowed but require VA-approved condos. Standards are moderate—better than FHA but less flexible than conventional.
Occupancy: Owner-occupied primary residence only. Investment properties not allowed.
Closing costs: Lender can pay closing costs; VA limits what the veteran can pay.
Occupancy and secondary homes: You cannot use VA loan benefit twice simultaneously. Once you sell a home bought with VA loan, the eligibility "restores" and can be reused.
Pros: 0% down, no PMI, lowest closing costs, usually 0.25–0.5% lower rates than conventional due to VA guarantee. Best loan product for qualified borrowers.
Cons: Funding fee is non-negotiable. VA appraisal can delay closing (VA appraisers are government employees, slower than private appraisers). Can only use for primary residence.
When VA makes sense: You're a veteran or active-duty service member. Use it. The 0% down and no PMI is unbeatable.
Comparison table
| Feature | Conventional | FHA | VA |
|---|---|---|---|
| Min down | 3% | 3.5% | 0% |
| Min credit | 620 | 580 | No official min |
| PMI/Insurance | 0.5–2% annual | 0.55–0.80% annual (permanent under 10%) | 1.25–3.6% one-time fee |
| Occupancy | Owner or investor | Owner only | Owner only |
| Property flexibility | High | Moderate | Moderate |
| Rate vs prime | Varies | +0.25–0.5% | −0.25–0.5% |
| Debt-to-income | Up to 43% | Up to 50% (with factors) | Up to 41% |
Worked example: $350,000 home, different loan types
Assumption: 6% mortgage rate (conventional baseline), 30-year term, $350,000 purchase.
Conventional, 10% down ($35,000):
- Loan: $315,000
- PMI (0.75%): $197/month
- P&I: $1,892
- Total: $2,089/month
FHA, 3.5% down ($12,250):
- Loan after UFMIP: $343,660
- AMIP: $229/month
- P&I: $2,062
- Total: $2,291/month
VA, 0% down ($0):
- Loan after funding fee: $358,050
- Funding fee (rolled in): 2.3% of $350,000 = $8,050
- P&I: $2,148
- Total: $2,148/month
Monthly cost: Conventional ($2,089) < VA ($2,148) < FHA ($2,291).
Over 30 years:
- Conventional: $2,089 × 360 = $752,040
- VA: $2,148 × 360 = $773,280 (but rate likely 0.25–0.5% lower = $50–70/month savings)
- FHA: $2,291 × 360 = $824,760
FHA is most expensive due to permanent insurance. VA is middle but includes 0% down (huge advantage). Conventional is cheapest if you have 10% down.
Loan selection flowchart
Next
You've chosen your loan type. Now comes an equally important decision: fixed-rate versus adjustable-rate mortgages. A fixed rate locks in certainty; an ARM bets that rates won't reset above your capacity. The choice depends on how long you plan to stay and your risk tolerance.