Let’s take a look at how conventional loans compare to some other popular loan options. While conventional loans are available to anyone who can meet the requirements, Department of Veterans Affairs (VA) loans are a benefit of military service and are only available to veterans, active-duty servicemembers and their surviving spouses. The requirements for VA loans are similar to that of conventional loans. VA loans, however, come with a few excellent benefits.Conventional Loans Vs. VA Loans
First, VA loans don’t require a down payment. Second, VA loans never require you to pay mortgage insurance.
If you’re thinking about getting a VA loan instead of a conventional loan, here are a few things to consider:
- You can’t use a VA loan to buy a second home. The Department of Veterans Affairs requires that VA loan holders occupy the home they purchased with a VA loan. Second homes and vacation homes are not allowed through VA loans.
- You’ll have to pay a funding fee. The VA funding fee offsets the cost to taxpayers of getting the VA loan. Certain groups are exempt from paying the funding fee. The funding fee ranges from 1.25% to 3.3% of the loan amount and varies based on your down payment, whether you’re buying a home or refinancing and how many times you’ve used your VA loan benefit.
Conventional Loans Vs. FHA Loans
Conventional loans have stricter credit requirements than FHA loans. FHA loans, which are backed by the Federal Housing Administration (FHA), offer the ability to get approved with a credit score as low as 500 with a 10% minimum down payment. Credit scores above 580 (which many lenders require as your minimum qualifying score – including Rocket Mortgage®) only require a minimum down payment of 3.5%. While conventional loans allow you to make a slightly smaller down payment of 3%, you must have a credit score of at least 620 to qualify.
When you’re deciding between a conventional loan versus an FHA loan, it’s important to consider the cost of mortgage insurance. If you put less than 10% down on an FHA loan, you’ll have to pay a mortgage insurance premium for the life of the loan – regardless of how much equity you have.
However, you won’t have to pay private mortgage insurance on a conventional loan forever if you make a down payment of 10% or more. In that case, the mortgage insurance premiums will be canceled after 11 years.
Conventional Loans Vs. USDA Loans
While conventional loans are available in all areas of the country, United States Department of Agriculture (USDA) loans* can only be used to purchase properties in qualifying rural areas. Those who qualify for a USDA loan may find that it’s a very affordable loan compared to other loan options. Although Rocket Mortgage doesn’t offer USDA loans currently, we’re providing this information to you to help you understand all of your choices for mortgages.
There’s no maximum income for a conventional loan, but USDA loans have income limits that vary based on the city and state where you’re buying the home. When evaluating your eligibility for a USDA loan, your lender will consider the incomes of everyone in the household – not just the people on the loan.
USDA loans don’t require borrowers to pay private mortgage insurance (PMI), but they do require borrowers to pay a guarantee fee, which is similar to PMI. If you pay it upfront, the fee is 1% of the total loan amount. You also have the option to pay the guarantee fee as part of your monthly payment. The guarantee fee is usually more affordable than PMI.
