Distinguishing Between VA, USDA, FHA, and Conventional Loans
Buying a home is a major investment for most people. Apart from finding a property that best meets your needs, you also have to determine the best loan program that matches your financial situation, and future financial goals. There are various loan programs in the U.S. all of which have their fair share of pros and cons. If you want to buy a home but do not know which loan program is best for you, our experienced mortgage experts can help. We analyze your case and suggest the best loan option according to your needs. To help you arrive at an informed decision, here a some key differences between VA, USDA, FHA, and Conventional loans.
1. Loan Type
VA loans are provided to veterans or their surviving spouses. These loans are guaranteed by the Department of Veteran Affairs (VA) and issued by qualified lenders. VA loans were introduced to help veterans living in areas with no or limited private financing options secure a loan. USDA loans are provided to rural property owners or those who intend to invest in a property located in rural areas. The primary eligibility criteria for this loan is that the applicant’s income must not exceed 115 percent of the median income for the area. FHA insured loans are provided to low income households by FHA-recognized lenders. Conventional loans are provided by private lenders. These loans are not backed by any government agency and the payment terms, interest rates, and down payment amount can vary for different lenders.
2. Credit Score Requirements
Credit score requirements can vary for different lenders, but likely not by much because they are all playing by similar rules imposed by the Department of Housing and Urban Development (HUD), the VA, USDA, and/or investors. That said, in most cases, VA lenders look for borrowers with a minimum credit score of 620, though a VA home loan with a bad credit can be obtained, if the borrower takes steps towards clearing all their debts. Typical credit score requirement to get an FHA loan is a minimum of 580, but most lenders will not go below 600 without significant overlays. Lenders offering USDA loans usually look for borrowers with a credit score of 620 or more. Credit score requirements to get a conventional loan are the most stringent and lenders usually look for borrowers with a credit score of 660 or more. Conventional programs pricing comes with Loan Level Pricing Adjustments (LLPA’s), which is just a fancy way of saying that pricing gets worse as the score gets lower, and better as the credit score gets better. Credit score can also make a significant difference in mortgage insurance premiums on Conventional loans.
3. Down Payment
When opting for an FHA loan, you will have to pay a down payment amount of at least 3.50 percent of the loan amount. There are no down payment obligations for VA and USDA loan borrowers, which is one of the biggest advantages of these loans. Down payment requirements for a conventional loan may vary anywhere between 3-5 percent of the loan amount. Though there are no downpayment obligations for VA and USDA loan borrowers, paying a down payment amount can help improve loan terms, such as lower interest rates.
4. Funding fee
Funding fee is charged by government bodies guaranteeing different loans. The money that these bodies collect helps sustain their operations and continue providing benefits to borrowers. The VA funding fee varies in the range of 1.25 percent-3.3 percent of the loan amount. The actual amount, however, will depend on many factors such as the down payment amount, and your service status. VA exempts veterans receiving disability benefits, and the spouses of service members who died in the line of duty or from a service related disability from paying this fee. FHA charges an upfront funding fee of 2.25 percent of the loan amount. When opting for USDA loan, you would have to pay a funding fee of 1 percent of the loan amount. Conventional loan borrowers do not have to pay any funding fees.
5. Allowed Seller Contribution
Sellers can offer to pay some common closing costs such as funding fee, property taxes, and credit balances on the buyer’s behalf. The maximum seller contribution for VA loans is 4 percent of the selling price. This rate is 6 percent for FHA loans and 3 percent for conventional loans respectively. The limit is 9 percent for conventional loan borrowers, but varies significantly based on loan-to-value (LTV) - in other words down payment amount - and whether it is a primary residence, second home, or investment property. Ask your mortgage expert and/or real estate professional for more details.
6. Maximum Loan Amount
Though VA does not impose any restrictions on the loan amount that an eligible veteran can borrow, the maximum guaranteed amount cannot exceed $424,100. We can still provide VA financing up to $1 million, however the borrower would need to pay 25% of the difference between the sales price and $424,100 as a down payment. So for example, to purchase an $800,000 home using a VA home loan, the buyer would need to provide a $93,975 down payment ($800,000 - $424,100 = $375,900 x 25% = $93,975). The maximum loan amount for FHA loans can vary according to the county but cannot exceed $636,150 (in high cost areas). The limit can be as low as $275,665 for counties with low housing costs. The USDA does not set a cap on the maximum loan amount, but instead qualification will primarily depend on the borrower’s income. The maximum loan amount for conventional loans varies anywhere in the range of $424,100- $1835,200 depending on the county.
Before applying for a home loan, it is important to know the differences between the available loan programs. Conducting an in-depth research about the pros and cons of each program helps you make informed decisions. However, this is where a true mortgage expert can provide significant value to you through guiding you to the right options for you. Contact us today for a free, no obligation consultation.