What is the Difference Between FHA, Conventional, VA and USDA Mortgages and How Do I Qualify?
When you think of a mortgage, you might tend to think that the experience is the same regardless of where you go and how it’s financed. The reality is that there are several different types of mortgages and which one you need is determined by the range of factors specific to each mortgage. It can be confusing to comb through all the different types of mortgages, but once you understand the details, the choice will be easier.
FHA mortgages are backed, or insured, by the Federal Housing Administration. FHA mortgages are available for those with lower credit scores than most other mortgages. As long as you’re willing and able to come up with a down payment of as much as 10%, an FHA mortgage will finance a credit score as low as the 500s. You can expect to put at least 3.5% down, minimum, with an FHA mortgage.
These mortgages will require a Mortgage Insurance Premium both at closing and as part of your monthly payment. The cost is determined by individual factors like the loan amount and down payment. Because of the credit requirements, FHA mortgages work well for lower credit score individuals, but they also make a great choice for a first time home buyer.
Conventional mortgage loans are issued by lenders, and they tend to have more strict requirements. These mortgages are not backed by the government. Lenders tend to be much more picky about who they will finance with a conventional mortgage, so a better credit score here is important.
The minimum down payment is slightly lower than the FHA mortgage in some cases, but this is offset often by a requirement to pay Private Mortgage Insurance (PMI). Since a down payment may be as little as 3%, the loan-to-value ratio will be further away from the preferred 80%/20% medium preferred by lenders. (Lenders ideally want to furnish 80% of the purchase price or less, to present less overall risk.) The good news is that PMI can be cancelled once you have paid enough on your mortgage.
VA Loans are guaranteed by the Department of Veterans Affairs. A VA mortgage is only available to homebuyers who are either themselves Veterans of the Armed Forces, are current military members, or their spouses. Borrowers must meet certain income requirements and must obtain a Certificate of Eligibility from the Department of Veteran Affairs.
VA mortgage interest rates tend to be among the lowest available in the mortgage market. Additionally, there are no minimum credit score requirements or down payment requirements.
USDA Mortgages are backed by the United States Department of Agriculture. Only buyers in certain rural locations will qualify for a USDA mortgage. As a borrower, you must fall under certain income threshold requirements which are specific to your area of the country. These mortgages can be a great idea for a first-time buyer or if you do not have a large down payment saved up. Just like their VA counterpart, USDA loans do not require a down payment. Credit scores for USDA loans need a better credit score than FHA loans, but are still available for those who have credit scores around the mid 600s.
Still Unsure About Your Best Mortgage Option?
While we hope that this article has cleared up some anxiety and misconceptions about mortgages, we understand that you may still have questions. The good news is that Range Lending is a mortgage broker, and so we help our clients find the mortgage solution that works best for them rather than steering your towards a less efficient option solely because that’s the only product we offer.
We invite you to arrange a meeting with one of our qualified mortgage professionals today to answer your questions and begin taking the steps towards your next home or refinance.