Key takeaways
- Conventional loans have no federal backing. FHA, VA and USDA loans are backed in part by the federal government but are still made by private lenders.
- Minimum down payments range from none for eligible VA and USDA borrowers to 3.5 percent for FHA, and as little as 3 percent on some conventional programs.
- Nearly every low-down-payment option carries mortgage insurance or a program fee. Compare the total cost, not only the down payment.
- Limits, fees and eligibility rules change. Confirm current requirements with a lender or the agency before relying on any figure.
Most home purchases in the United States are financed with one of four families of loans. They can look similar on a rate sheet, but they differ in who stands behind them, who can use them, how much cash you need up front and what insurance or fees come attached. Knowing the differences helps you ask a lender the right questions.
Conventional loans
A conventional loan is not insured or backed by a federal agency. Many are conforming loans, meaning they meet the standards of Fannie Mae and Freddie Mac and fall within the conforming loan limit the Federal Housing Finance Agency sets each year. Loans above that limit are often called jumbo loans and may have stricter requirements.
A 20 percent down payment is often described as standard, but it is not required. Some conventional programs accept as little as 3 percent down from eligible borrowers. The catch is private mortgage insurance (PMI), which is generally required when you put down less than 20 percent. PMI protects the lender, not you.
PMI does not have to last forever. Under federal law you can ask to cancel it once your balance is scheduled to reach 80 percent of the home’s original value, and for most loans it ends automatically at 78 percent, as long as your payments are current.
FHA loans
FHA loans are insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. They are designed to widen access to homeownership for borrowers with smaller down payments or less-established credit.
- Down payment: a minimum of 3.5 percent with a credit score of 580 or higher, and 10 percent for scores from 500 to 579. Individual lenders may set stricter standards.
- Mortgage insurance: an upfront premium, which can usually be added to the loan, plus an annual premium paid monthly. With less than 10 percent down, the annual premium generally lasts for the life of the loan.
- Limits and property standards: loan limits vary by county, and the home must meet FHA’s minimum property standards.
Because the premium can be permanent, some borrowers later refinance into a conventional loan to remove it once they have enough equity.
VA loans
VA loans are backed in part by the U.S. Department of Veterans Affairs and are available to eligible service members, veterans and certain surviving spouses. Eligibility is documented with a Certificate of Eligibility.
- Down payment: often none, as long as the price does not exceed the appraised value.
- Mortgage insurance: no monthly mortgage insurance.
- Funding fee: a one-time fee that varies with your down payment and prior use of the benefit. It can be financed, and some borrowers, including veterans who receive VA compensation for a service-connected disability, are exempt.
VA loans are meant for a home you will live in, and VA rules limit some of the closing costs a borrower can be charged.
USDA loans
USDA home loans are offered through the U.S. Department of Agriculture’s Rural Development programs for homes in areas USDA designates as eligible rural areas. Most are made by approved private lenders and backed by USDA; the agency also lends directly to some lower-income applicants.
- Location: the property must be in an eligible area, which is checked by address.
- Income: household income must fall within limits based on the local area median income.
- Down payment: often none for eligible borrowers.
- Fees: an upfront fee and an annual fee that work much like mortgage insurance.
The four loan types at a glance
| Loan type | Backed by | Designed for | Minimum down payment | Insurance or fees |
|---|---|---|---|---|
| Conventional | No federal backing | A broad range of borrowers | 3% on some programs | PMI below 20% down, removable later |
| FHA | Federal Housing Administration | Smaller down payments, more flexible credit | 3.5% with a 580+ score | Upfront and annual premiums |
| VA | Department of Veterans Affairs | Eligible service members, veterans and some surviving spouses | Often none | Funding fee unless exempt; no monthly insurance |
| USDA | Department of Agriculture | Low- and moderate-income buyers in eligible rural areas | Often none | Upfront and annual fees |
A summary for orientation only. Requirements differ by lender and change over time.
Look past the down payment
A smaller down payment means a larger loan, more interest over time and, in most cases, an insurance premium or fee. That can still be the right trade for you. Just compare the full monthly payment and the total upfront cost of each option, not the down payment alone.
How to narrow the choice
- Start with eligibility. Military service or a home in an eligible rural area can open options with no down payment.
- Consider your cash. Down payment, closing costs and the savings you want to keep afterward all draw on the same money.
- Think about how long you will stay. Mortgage insurance that can be removed later behaves very differently from a premium that lasts the life of the loan.
- Ask for more than one quote. Ask each lender to price every program you qualify for, then compare the Loan Estimates side by side.
Helpful official resources
- U.S. Department of Housing and Urban DevelopmentThe federal department that oversees the Federal Housing Administration and HUD-approved housing counseling.hud.gov
- Consumer Financial Protection BureauThe federal agency responsible for protecting consumers of financial products, including mortgages.consumerfinance.gov
- USA.govThe official guide to US government agencies, information and services.usa.gov
About this guide. OwnMG publishes general educational information. It is not financial, legal or insurance advice, and OwnMG is not a lender, insurer, broker or government agency. Rules, limits and fees change, so confirm current details with your lender or the agency involved. Spotted something out of date? Tell us at info@ownmg.com.
