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6.1. What Loan Program is Best for You?

Loan Program Pros and Cons

When looking to purchase or a refinance, it is important to understand the difference between Conventional, FHA, VA and USDA loans.

Conventional, FHA, VA and USDA loans are similar because they are all issued by banks and other approved lenders, but there are major differences between these types of loans. The information below will help you understand each option in greater detail so that you can decide which loan is best for you.

When you apply for a home loan or refinance, you can apply for a government-backed loan (like an FHA or VA loan) or a conventional loan (not insured or guaranteed by the federal government). This means that, unlike federally insured loans, conventional loans carry no guarantees for the lender if you fail to repay the loan.

For this reason, if you make less than a 20% down payment on the property, you’ll have to pay for private mortgage insurance (PMI) when you get a conventional loan. The mortgage insurance is in place if you default on the loan, the mortgage insurance company makes sure the lender is paid in full.

What Loan is Right For You?

  • FHA

  • PROS

    • More flexibility with bruised or newer credit (600+), limited savings, or tighter debt-to-income ration (up to 50%)
    • Interest rate is often lower than that for a Conventional loan
    • Lower minimum required down payment (3.5%)
    • Down payment assistance programs available

    CONS

    • Monthly mortgage insurance premiums are typically more expensive and stay the life of the loan
    • FHA charges a 1.75% upfront fee (financed into the loan amount)
    • The property needs to meet a higher standard than needed for conventional loans
    • More paperwork is involved

  • CONVENTIONAL

  • PROS

    • Lower monthly mortgage insurance premiums, making the overall payment lower
    • No mortgage insurance premiums required with 20% down payment
    • If mortgage insurance premiums are required, it can be removed once buyer has 20% equity in home
    • Property standards not as particular
    • Less paperwork is involved

    CONS

    • Holds buyer to a higher standard in terms of credit (700+ ideal)
    • Larger down payment needed (3-5% minimum)
    • Requires lower debts to income ratio (45%)
    • Interest rate and monthly mortgage insurance premiums are more expensive with lower credit scores

  • VA

  • PROS

    • No down payment needed
    • No monthly mortgage insurance premiums
    • VA Funding fee can be waived if Veteran has over 10% disability
    • Interest rate is often lower than a Conventional loan
    • Allows higher debt to income ratio (50%)

    CONS

    • Property needs to meets a slightly higher standard
    • Seller has to pay for certain fees that are typically paid for by buyer (termite inspection and title company closing fee)
    • More paperwork is involved
    • Borrower needs to meet residual income requirement