Comparing the Loan Types
Sometimes it helps to look at the four major loan options with some hard, real-world numbers.
For this example, let’s say you’re looking at a $200,000 mortgage with an interest rate of 4.75 percent. We’ll estimate your property taxes and homeowners insurance costs at $260 per month.
|Loan Type||Minimum Credit Score||Minimum Down Payment||Funding Fee||Principal & Interest||Mortgage Insurance||Monthly Payment|
You can see that VA homebuyers have the lowest monthly mortgage payment given these parameters. But there are advantages and disadvantages to every loan option.
Credit score minimums are going to vary based on the lender, the loan type and other factors. FHA loans allow for credit scores in the 500s, but you’re more likely to see lenders requiring a 640 or a 650 FICO score for any government-backed loan, be it FHA, USDA or VA.
The credit score benchmark for conventional loans is usually at least 640. But you’ll typically need more like a 740 to have a shot at the best rates and terms for conventional financing.
Government-backed loans are also more flexible and forgiving when it comes to things like previous bankruptcies, foreclosures and other derogatory credit.
Being able to purchase without a down payment is a tremendous advantage. But you will not have equity in the property to start. The VA Funding Fee varies based on the nature of your service, down payment and whether you’ve used the VA program before. In this example, we used the 2.3 percent most first-time buyers pay. A buyer reusing their VA loan benefits would pay a higher fee (3.6 percent), which would bump the monthly payment to $1,375. As with the other government-backed options, the fee in this example is financed into the loan.
These loans have more lax credit requirements and a lower down payment (3.5 percent) than conventional loans, but they also tend to feature the most expensive mortgage insurance, which borrowers now pay for the life of the loan. FHA loans have an upfront funding fee (1.75 percent of the loan amount) and an annual mortgage insurance premium (0.85 percent of the loan balance for most borrowers).
This is the only other no-down payment mortgage program. Borrowers will pay mortgage insurance for the life of the loan. USDA loans feature both an upfront funding fee (1 percent of the loan) and annual mortgage insurance (0.35 percent of the loan balance). These are also the most restrictive loans of the group. Homebuyers are required to purchase in what the USDA deems a qualified rural area and have an income at or below 115 percent of the area median income, adjusted for family size.
This loan requires the highest down payment (5 percent), but you begin with the most equity. Borrowers who can’t put down 20 percent (that would be $40,000 in this example) will pay private mortgage insurance. The rate for PMI can vary based on several factors, including credit score and down payment. It’s typically anywhere from 0.2 to 1.5 percent of the loan balance. For this example, we used a PMI rate of 0.72 percent.
What's the Best Fit?
Determining which loan product is the best fit for you is a conversation that should include a loan officer you trust. They can help you run the numbers and give you a clear sense of what makes the best financial sense.
A VA loan isn’t automatically the best fit just because you’re eligible. Qualified borrowers who have sterling credit and the ability to put down at least 20 percent would want to take a long look at conventional financing.
But the reality is that kind of financial profile isn’t the norm for many VA-eligible homebuyers. That’s what makes the homebuying benefits of the VA loan program so powerful.