When it’s time to buy a home, the type of mortgage you choose matters. But with so many options out there, how do you know whether to apply for a conventional loan, or a mortgage loan backed by the Federal Housing Administration (FHA) or the Veterans Affairs (VA) Department?

Each mortgage product has its own advantages and disadvantages depending on your financial profile and the type of home you want to purchase. We’ll walk you through the differences between these loan types to help you decide which is the best one you can qualify for, and save the most money over time.

Comparing Conventional, FHA and VA Loans

There are many types of loans available to homebuyers. but the most common are: Conventional, FHA and VA loans. They all work a bit differently and have varying qualification requirements.

What Is a Conventional Loan?

The most common type of mortgage, conventional loans, are originated and serviced by private banks, credit unions and other financial institutions. They are not backed by any government agency.

However, many conventional mortgages are considered “conforming” loans, meaning they conform to loan limits set by the Federal Housing Finance Agency (FHFA). They also meet certain standards set in place by the government-sponsored enterprises known as Fannie Mae and Freddie Mac, which purchase and guarantee these loans, and then sell them as mortgage-backed securities to investors.

Conventional loans that don’t meet these guidelines are known as nonconforming loans. That can include loans that exceed the limits set by the FHFA (known as jumbo loans) or have looser credit score requirements (known as subprime loans).

What Is an FHA Loan?

An FHA loan is a type of mortgage that’s backed by the Federal Housing Administration (FHA). The FHA doesn’t actually fund these mortgage loans. Rather, it insures loans that are made by individual, FHA-approved lenders so that they are financially protected if the borrower defaults.

These loans are designed for prospective homeowners who wouldn’t otherwise qualify for an affordable conventional loan, especially first-time homebuyers, and offer more relaxed down payment and credit score requirements. They can only be used to finance primary residences, not investment or vacation properties.

What is a VA Loan?

Similar to FHA loans, VA loans are government-backed mortgages that are partially guaranteed by the U.S. Department of Veterans Affairs (VA). They are issued by independent financial institutions, which are able to offer more favorable terms since the VA guarantees a portion of the funds.

VA loans are specifically designed to help service members, veterans and eligible surviving spouses become homeowners. They can be used to purchase a property as a primary residence or refinance an existing mortgage.

Which Loan is Best for You?

If you’re thinking about buying a home soon, you might be wondering which type of mortgage is best to pursue. Whether you should go with a convention, FHA or VA loan will depend on a few factors related to your financial situation.

Down Payment Plays a Role

One thing to consider is how much money you can afford to save up for a down payment. Here’s a closer look at the down payment requirements for each type of loan.

  • Conventional loan: It’s possible to take out a conventional loan with as little as 3% down. However, if you put anything less than 20% down, you’ll be required to pay private mortgage insurance (PMI) until you reach a loan-to-value (LTV) ratio of 80%. PMI is calculated as a percentage of your total loan amount and ranges from 0.58% to 1.86%.
  • FHA loan: Unlike conventional loans, you’re required to pay FHA mortgage insurance regardless of your down payment. However, if you put down at least 10%, you can drop the mortgage insurance after 11 years of payments, otherwise it remains for the entire loan term. FHA mortgage insurance requires an upfront premium payment of 1.75% of the loan amount, and then yearly payments of 0.45% to 1.05% of the loan amount, depending on certain factors.
  • VA loan: Unlike conventional and FHA loans, VA loans require no down payment. They also require no mortgage insurance, but do come with a one-time funding fee of 1.25% to 3.3% of the loan amount.

Debt-to-income

Your debt-to-income ratio (DTI) measures how much of your monthly gross income goes toward paying off debt. Most mortgage lenders have maximum DTI requirements, but those requirements vary depending on your specific loan type.

  • Conventional loan: Most lenders will require a back-end DTI (your potential mortgage payment, plus all your other debt payments, compared to monthly income) of no more than 45%. If you have excellent credit or a large down payment, your lender may allow a DTI of up to 50%.
  • FHA loan: The maximum DTI allowed for FHA loans is 57% if you have a credit score of at least 580. For borrowers with lower scores, the maximum DTI allowed by most lenders is 43%.
  • VA loan: The acceptable DTI limit for most VA loans is 41%. However, it’s possible to qualify for a VA loan with a DTI of up to 60%, though you will be subject to more extensive underwriting.

Credit History

Aside from down payment and DTI, your credit score will also play a factor in whether it’s best to apply for a conventional, FHA or VA loan. Here are more details about the credit score requirements for these loans.

  • Conventional loan: Lenders generally require a minimum credit score of 620 to qualify for a conventional loan, though some may prefer a score of at least 660. Ultimately, credit score requirements are up to the individual lender. The higher your credit score, the better interest rates and loan terms you’ll receive.
  • FHA loan: The minimum credit score requirement for an FHA loan depends on your down payment size. You can take out an FHA loan with a credit score as low as 580 if you put at least 3.5% down, or a score as low as 500 with at least 10% down.
  • VA loan: If your credit isn’t in great shape, the good news is that VA loans have no minimum credit score requirement to qualify. However, individual lenders may have their own credit score benchmarks that must be met in order to be approved.

Below is a simple breakdown of how these types of loans compare:

Conventional loan FHA loan VA loan
Minimum down payment 3% 3.5%  None
Maximum DTI 50% 57% 60%
Minimum credit score 620 580 with 3.5% down; 500 with 10% down None
Mortgage insurance required 0.58%-1.86% annual PMI premium with less than 20% down 1.75% upfront premium, with annual fees  1.25%-3.3% upfront funding fee
Best for… Borrowers with good credit Borrowers with fair credit or a small down payment Service members, veterans and their spouses

Next Steps

Now that you know the basics of how conventional, FHA and VA loans work, it’s time to consider which one fits your needs best.

Talk With Your Lender

Your prospective lender is a good place to start. Many lenders are approved to make several types of loans, including conventional mortgages and government-backed mortgages such as FHA and VA loans. Discuss your options and see what’s available.

Compare Rates and Costs

Remember, it’s not just about getting approved or a low monthly payment. You also need to crunch the numbers and figure out how much a certain loan will cost you over the entire term. That means comparing factors such as the interest rate, mortgage insurance, closing costs and more. It’s a good idea to get quotes from several lenders so you can compare rates and fees to find the best deal available based on your financial situation. Additionally, you could use our FHA home loan calculator to help estimate your monthly payments.