Most conventional loans today are approved using guidelines established by Fannie Mae and Freddie Mac and make up nearly two-thirds of all mortgage loans approved today. Conventional loans provide a wide range of loan terms ranging from 10 to 30 years in both fixed and adjustable rates.
Conventional loans require a down payment of at least 5.0% of the sales price of the home but will require a private mortgage insurance policy covering the difference between the mortgage balance and the market value of the home. No private mortgage insurance is required when the mortgage is at 80% of the sales price of the home.
Conventional loans can be used to finance a single family home to a 2-4 unit property for either a primary residence, vacation home or investment property.
FHA loans were introduced by the Federal Housing Administration back in 1934 and today are the most popular option for first time buyers seeking to buy and finance a home with as little cash as possible. The minimum down payment required for an FHA loan is 3.5% of the sales price. There are no restrictions such as location, veteran status or monthly income. An FHA loan compensates the lender at 100% of the loss due to default.
The Department of Veterans’ Affairs introduced the VA loan in 1944. This program is available to veterans of the armed forces, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and unremarried surviving spouses of those who died while in service or as a result of a service related injury. VA loans do not require a down payment while also limiting the types of closing costs the veteran is allowed to pay. The guarantee applies to 25% of the loss to the lender in the instance of default, which is rare for VA loans.
The United States Department of Agriculture is another zero down payment option. A USDA loan is designed to finance owner-occupied purchases in rural and semi-rural areas. A home must be located in an approved region to become eligible for a USDA loan. Household must not exceed 115% of the median household income for the area. The guarantee applies to 100% of any loss. Government loan options include loan terms ranging from 10 to 30 years in both fixed, adjustable and hybrid options.
Which is the better option of the three? If you’re VA eligible and want the lowest cost mortgage, the VA home loan is usually a good choice. The USDA loan also requires less money down but does have to be located in a specific area. Your loan officer can help determine if a property you’re interested in qualifies. Finally, if you’re not VA eligible and the property is not in an approved zone, the FHA mortgage is an excellent option.