How to choose between an FHA, VA or conventional home loan

Posted on June 14 By Peter Andrew

People who work with home loans every day can forget just how confusing their jargon can be to outsiders. Here is a quick overview of the three main types of mortgage from which both first-time buyers and old hands may choose. In America, the money borrowed by home buyers is almost invariably provided by commercial lenders, but the federal government guarantees at least part of the debt for Federal Housing Administration (FHA) loans and Veterans Administration (VA) mortgages.

FHA loans

FHA loans are currently the most popular form of borrowing among home buyers. That federal guarantee reduces the risk that lenders take on when providing these mortgages, which allows them to require smaller down payments (as low as 3.5 percent of the appraiser's valuation of the home) and less perfect credit (sometimes a score of 630 or so is sufficient) than they do from other borrowers. Closing costs can also be lower too, according to the FHA's website.

However, FHA loans frequently come at a price, and, as The Seattle Times highlighted in February, they've recently become more expensive as new rules kick in. There's a good chance that -- providing you have a sufficiently large down payment and high credit score -- the overall cost of your borrowing over the lifetime of your mortgage would be lower if you opt for a conventional loan.

VA mortgages

VA mortgages are designed to give special privileges to those who served their country in the military, and the surviving spouses of those who died on active service or as a result of their service. The loans are only available to those who meet strict eligibility rules.

Perhaps the two key advantages of VA mortgages are:

  1. They require zero down payment -- providing the price paid doesn't exceed the appraiser's valuation of the property.
  2. Credit score requirements are low -- maybe as low as 620.

VA mortgages may also be less expensive than comparable FHA loans, because private mortgage insurance premiums are not payable. Closing costs are limited, and you can also pay off your loan early without penalty.

Conventional mortgages

Just to make life difficult, different people define "conventional mortgage" in different ways. Some say it's synonymous with "conforming loan," which means one that conforms to Freddie Mac's and Fannie Mae's standards.

However, others, including The San Francisco Chronicle, say a conventional mortgage is any home loan that isn't guaranteed by the government under programs such as those managed by the FHA and VA -- and that seems a more helpful definition.

Mortgage lenders view each application in the round. Someone with a high credit score but a low down payment (or vice versa) may or may not meet an individual company's criteria. Currently, most in theory require a minimum 5 percent down payment, although in practice more may be required.

Anyone who can qualify, may well find the overall cost of a conventional loan to be lower than those from government-backed programs, so people who are borderline cases might wish first to explore the conventional route.

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