When it comes to home loans, many prospective homebuyers hear about VA, FHA, and Conventional loans, but might not fully understand the unique benefits or eligibility requirements. Each loan type has its perks, challenges, and nuances that can be crucial for the right borrower.
Here are five things you probably didn’t know about these popular loan types.
1. VA Loans Have No Down Payment and No PMI (Private Mortgage Insurance)
If you’re a veteran, active-duty military member, or spouse of one, a VA loan offers an incredible benefit: no down payment. But that’s not all. Unlike FHA and Conventional loans, VA loans also waive the requirement for Private Mortgage Insurance (PMI), which is typically required if you don’t put down at least 20%. This can save veterans thousands of dollars over the life of their loan.
Even though there's no PMI, VA loans come with a one-time funding fee, which can be rolled into the mortgage. However, many veterans qualify for exemptions from this fee due to service-related disabilities.
2. FHA Loans are Ideal for Low Credit Scores
If your credit score is less than stellar, FHA loans might be your best option. Most conventional loans require a credit score of at least 620, while FHA loans are much more lenient, accepting scores as low as 500 (though you’ll need a 10% down payment for scores below 580).
For scores of 580 and higher, you could secure an FHA loan with a down payment as low as 3.5%. This makes FHA loans popular among first-time homebuyers who are still building their credit profiles.
3. Conventional Loans Are Best for Borrowers with 20% Down
Most people think Conventional loans always require 20% down, but that's not entirely true. You can actually get a Conventional loan with a down payment as low as 3%. However, if you can put down 20%, you'll avoid PMI, which can be a significant monthly savings.
Additionally, borrowers with excellent credit scores (usually 740 and above) are more likely to benefit from lower interest rates with Conventional loans, compared to FHA or VA loans.
4. VA Loans Have No Loan Limits
One surprising fact about VA loans is that there is no official loan limit for VA-eligible borrowers. In the past, the VA loan limit was tied to the conforming loan limits set by Fannie Mae and Freddie Mac. However, as of 2020, if you have full entitlement (meaning you have not used a VA loan before or have paid off a previous VA loan), you can borrow as much as you can afford without a loan limit.
This feature makes VA loans particularly attractive in high-cost housing markets, where conventional loan limits can be restrictive.
5. FHA Loans Are More Forgiving on Debt-to-Income Ratios
When lenders assess your ability to repay a mortgage, they look at your debt-to-income (DTI) ratio, which is your total monthly debt payments divided by your gross monthly income. Conventional loans tend to cap DTI ratios at around 43-45%, but FHA loans are more flexible, sometimes accepting DTIs as high as 50-55%.
This can be a game-changer for borrowers who have higher levels of debt, such as student loans or credit card debt, but still have a steady income that supports their mortgage payments.
Choosing between VA, FHA, and Conventional loans can be tricky, especially if you don’t know the full range of benefits each type offers. VA loans offer unparalleled benefits to veterans and military members, including no down payment and no PMI, while FHA loans are often the go-to for first-time homebuyers with lower credit scores. Conventional loans, on the other hand, are ideal for borrowers with good credit and a 20% down payment.
Understanding these finer details can help you make a smarter decision on your path to homeownership. If you’re unsure which loan is best for you, it’s always wise to speak with a mortgage advisor who can guide you through the process.
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