Mortgage Options Compared: FHA vs Conventional vs VA vs USDA Loans
You’re ready to buy a house. You’ve saved for a down payment. You have good credit. Now you need a mortgage.
But which type? FHA? Conventional? VA? USDA?
Each mortgage type has different:
- Down payment requirements (3.5% to 20%+)
- Interest rates
- Mortgage insurance costs
- Qualification requirements
- Total costs over the life of the loan
Choosing the wrong mortgage can cost you $10,000-$50,000+ over 30 years.
This guide breaks down the 4 main mortgage types, shows you real cost comparisons, and helps you choose the best option for your situation as a college dropout buying your first home.
The 4 Main Mortgage Types
| Feature | FHA | Conventional | VA | USDA |
|---|---|---|---|---|
| Down payment minimum | 3.5% | 3-5% (first-time), 5-20% | 0% | 0% |
| Credit score minimum | 580+ (3.5% down), 500-579 (10% down) | 620+ | 580+ | 640+ |
| Mortgage insurance | Required (life of loan if <10% down) | Required if <20% down (removable) | None | Annual fee (0.35%) |
| Upfront fees | 1.75% of loan | None | 2.3% funding fee | 1% guarantee fee |
| Interest rates | Competitive | Lowest (with good credit) | Lowest | Very competitive |
| Property requirements | Any | Any | Must meet VA standards | Rural areas only |
| Income limits | None | None | None | Yes (varies by area) |
| Best for | Lower credit scores, small down payment | Strong credit, competitive rates | Veterans/service members | Rural homebuyers |
Quick recommendation:
- VA loan if you’re a veteran (best deal, no down payment, no PMI)
- FHA loan if you have lower credit (580-660) or small down payment
- Conventional loan if you have good credit (680+) and 5-10% down
- USDA loan if buying in a rural area and meet income limits
FHA Loans (Most Popular for First-Time Buyers)
What it is: Government-backed loan insured by the Federal Housing Administration.
How it works:
- You put down as little as 3.5%
- FHA insures the loan (lender’s risk is reduced)
- You pay mortgage insurance for this protection
- Easier to qualify (lower credit scores accepted)
FHA Loan Requirements
Minimum credit score: 580 (for 3.5% down), 500-579 (for 10% down)
Down payment: 3.5% minimum (with 580+ credit score)
Debt-to-income ratio: Max 43% (sometimes up to 50% with compensating factors)
Mortgage insurance:
- Upfront: 1.75% of loan amount (can be rolled into loan)
- Annual: 0.55-0.85% of loan balance (paid monthly)
- Duration: Life of loan if you put down less than 10%
Property requirements:
- Must be owner-occupied (live there)
- Must meet FHA minimum property standards (safety/livability)
- Appraisal required
FHA Loan Example
Scenario:
- Home price: $300,000
- Down payment: 3.5% = $10,500
- Loan amount: $289,500
- Credit score: 620
- Interest rate: 6.5%
Costs:
- Upfront mortgage insurance: $5,066 (1.75% of loan, added to loan balance)
- Loan amount with MIP: $294,566
- Monthly payment (P&I): $1,862
- Annual mortgage insurance: $220/month (0.85%)
- Total monthly payment: $2,082 (P&I + MIP)
Over 30 years:
- Total interest paid: $375,891
- Total mortgage insurance paid: $79,200
- Total cost of borrowing: $455,091
FHA Pros
✅ Low down payment: 3.5% (vs 20% traditional) ✅ Lower credit scores accepted: 580+ (vs 620+ conventional) ✅ Higher debt-to-income allowed: Up to 43-50% ✅ Gift funds allowed: Down payment can come from family ✅ Easier to qualify: More lenient underwriting
FHA Cons
❌ Mortgage insurance for life: If you put down less than 10% ❌ Upfront mortgage insurance: 1.75% added to loan ❌ Property requirements: Must meet FHA standards (some homes don’t qualify) ❌ Loan limits: Varies by county (often lower than conventional) ❌ Higher total cost: Mortgage insurance adds $50K-$100K over life of loan
Who Should Get an FHA Loan
You if:
- Your credit score is 580-680
- You have less than 10% for down payment
- You’re a first-time homebuyer with limited savings
- You need flexibility with debt-to-income ratio
Not you if:
- Your credit score is 700+ (conventional is cheaper)
- You have 10-20% down payment (conventional with PMI removal is better)
- You’re buying above FHA loan limits
Conventional Loans (Best for Strong Credit)
What it is: Mortgage not backed by the government. Offered by banks, credit unions, and mortgage companies.
How it works:
- You qualify based on credit score and income
- If you put down less than 20%, you pay PMI (private mortgage insurance)
- Once you reach 20% equity, PMI can be removed
- More flexibility, better rates for strong borrowers
Conventional Loan Requirements
Minimum credit score: 620 (but 740+ gets best rates)
Down payment: 3% (first-time buyers), 5% (repeat buyers), ideally 20%
Debt-to-income ratio: Max 43% (sometimes 50% with strong credit)
Mortgage insurance:
- Required if down payment < 20%
- Annual: 0.3-1.5% of loan balance (depends on credit, down payment)
- Duration: Until you reach 20% equity (can be removed)
Property requirements:
- Standard appraisal
- No specific government standards
Conventional Loan Example
Scenario:
- Home price: $300,000
- Down payment: 5% = $15,000
- Loan amount: $285,000
- Credit score: 720
- Interest rate: 6.25% (lower than FHA due to better credit)
Costs:
- Upfront mortgage insurance: $0
- Monthly payment (P&I): $1,754
- PMI: $118/month (0.5% annually)
- Total monthly payment: $1,872
Over 30 years:
- Total interest paid: $346,440
- Total PMI paid: $14,160 (paid for ~10 years until 20% equity)
- Total cost of borrowing: $360,600
Compare to FHA (same scenario):
- FHA total cost: $455,091
- Conventional total cost: $360,600
- Savings: $94,491
Conventional Pros
✅ PMI can be removed: Once you hit 20% equity (vs FHA where it’s for life) ✅ Lower total cost: If you have good credit (680+) ✅ No upfront insurance: Unlike FHA’s 1.75% upfront ✅ Higher loan limits: Can borrow more ✅ More property flexibility: No strict property standards
Conventional Cons
❌ Stricter credit requirements: Need 620+ (ideally 740+) ❌ Higher down payment: 5% typical (vs 3.5% FHA) ❌ Lower debt-to-income tolerance: Less flexible than FHA ❌ Higher rates for lower credit: If credit is under 700, FHA may be cheaper
Who Should Get a Conventional Loan
You if:
- Your credit score is 700+
- You have 5-20% for down payment
- Your debt-to-income is under 43%
- You want to remove PMI later (when you hit 20% equity)
This is the best option for most college dropouts with strong credit and steady income.
VA Loans (Best Deal for Veterans)
What it is: Mortgage guaranteed by the Department of Veterans Affairs for veterans, active-duty service members, and eligible spouses.
How it works:
- No down payment required
- No monthly mortgage insurance
- Lower interest rates
- VA guarantees part of loan (reduces lender risk)
VA Loan Requirements
Eligibility:
- Veterans (served 90+ days during wartime, 181+ days during peacetime)
- Active-duty service members
- National Guard/Reserve members (6+ years)
- Surviving spouses of veterans
Certificate of Eligibility (COE): Required (free, apply online at VA.gov)
Minimum credit score: 580+ (though most lenders want 620+)
Down payment: $0 (though you can put money down if you want)
Funding fee: 2.3% of loan (first-time use), 3.6% (subsequent use)
- Can be rolled into loan
- Waived for disabled veterans
Property requirements:
- Must meet VA minimum property requirements
- Must be owner-occupied
VA Loan Example
Scenario:
- Home price: $300,000
- Down payment: $0
- Loan amount: $300,000
- Credit score: 680
- Interest rate: 6.0% (typically 0.25-0.5% lower than conventional)
Costs:
- Upfront funding fee: $6,900 (2.3%, added to loan)
- Loan amount with fee: $306,900
- Monthly payment (P&I): $1,839
- Mortgage insurance: $0
- Total monthly payment: $1,839
Over 30 years:
- Total interest paid: $355,140
- Total mortgage insurance: $0
- Total cost of borrowing: $362,040
Compare to FHA (same scenario):
- FHA total cost: $455,091
- VA total cost: $362,040
- Savings: $93,051
VA Pros
✅ No down payment: Buy with $0 down ✅ No monthly mortgage insurance: Saves $50K-$100K over life of loan ✅ Lowest interest rates: Typically 0.25-0.5% lower ✅ No prepayment penalty: Pay off early without fees ✅ Easier to qualify: More lenient credit/income requirements
VA Cons
❌ Eligibility required: Must be veteran or active-duty ❌ Funding fee: 2.3% upfront (though can be financed) ❌ Property requirements: Must meet VA standards ❌ Only for primary residence: Can’t use for investment property
Who Should Get a VA Loan
You if:
- You’re a veteran, active-duty service member, or eligible spouse
- You’re eligible (period—this is the best mortgage deal)
No contest: If you qualify for a VA loan, use it.
USDA Loans (Rural Homebuyers)
What it is: Government-backed loan for rural and suburban areas, guaranteed by USDA (U.S. Department of Agriculture).
How it works:
- No down payment required
- Property must be in USDA-eligible area (rural/suburban)
- Income limits apply
- Very low interest rates
USDA Loan Requirements
Location: Property must be in USDA-eligible area (check USDA eligibility map)
Income limits:
- Household income must be under 115% of area median income
- Varies by county (typically $80K-$110K for family of 4)
Minimum credit score: 640+
Down payment: $0
Guarantee fee:
- Upfront: 1% of loan (rolled into loan)
- Annual: 0.35% of loan balance (paid monthly)
Property requirements:
- Must be in eligible rural area
- Must be owner-occupied
- Must be modest (not luxury)
USDA Loan Example
Scenario:
- Home price: $250,000 (rural area)
- Down payment: $0
- Loan amount: $250,000
- Income: $85,000 (under area limit)
- Interest rate: 6.25%
Costs:
- Upfront guarantee fee: $2,500 (1%, added to loan)
- Loan amount with fee: $252,500
- Monthly payment (P&I): $1,554
- Annual fee: $73/month (0.35%)
- Total monthly payment: $1,627
Over 30 years:
- Total interest paid: $307,040
- Total guarantee fees: $26,280
- Total cost of borrowing: $335,820
USDA Pros
✅ No down payment: Buy with $0 down ✅ Low interest rates: Competitive with VA loans ✅ Low mortgage insurance: 0.35% annual (vs 0.85% FHA) ✅ Low upfront fee: 1% (vs 1.75% FHA, 2.3% VA)
USDA Cons
❌ Location restrictions: Must be in rural/suburban eligible area ❌ Income limits: Can’t earn too much ❌ Longer processing: More documentation, slower approval ❌ Property restrictions: Must meet USDA standards
Who Should Get a USDA Loan
You if:
- You’re buying in a rural or suburban area (check USDA map)
- Your income is under the area limit
- You have little to no down payment savings
- You want low rates and low fees
Great option for college dropouts buying outside major cities.
Side-by-Side Cost Comparison
Home price: $300,000 Credit score: 680 30-year fixed rate
| Loan Type | Down Payment | Interest Rate | Monthly P&I | Monthly MI | Total Monthly | Total Interest | Total MI | Total Cost |
|---|---|---|---|---|---|---|---|---|
| FHA (3.5% down) | $10,500 | 6.5% | $1,862 | $220 | $2,082 | $375,891 | $79,200 | $455,091 |
| Conventional (5% down) | $15,000 | 6.25% | $1,754 | $118 | $1,872 | $346,440 | $14,160 | $360,600 |
| Conventional (20% down) | $60,000 | 6.0% | $1,439 | $0 | $1,439 | $278,040 | $0 | $278,040 |
| VA (0% down) | $0 | 6.0% | $1,839 | $0 | $1,839 | $362,040 | $0 | $362,040 |
| USDA (0% down) | $0 | 6.25% | $1,554 | $73 | $1,627 | $307,040 | $26,280 | $335,820 |
Key insights:
- VA loan is best deal for veterans (no down payment, no MI)
- USDA loan is second-best for rural buyers (low fees)
- Conventional 20% down has lowest total cost (but requires $60K upfront)
- FHA costs $94K more than conventional over 30 years (due to lifetime MI)
How to Choose the Right Mortgage
Decision Tree
START:
Are you a veteran or active-duty service member?
- Yes → Apply for VA loan (best deal, period)
- No → Continue
Is the property in a USDA-eligible area AND you meet income limits?
- Yes → Apply for USDA loan (great deal, no down payment)
- No → Continue
Is your credit score 700+?
- Yes → Apply for conventional loan (better rates, removable PMI)
- No → Continue
Is your credit score 580-699?
- Yes → Apply for FHA loan (easier to qualify, lower credit accepted)
- No (under 580) → Work on improving credit first
Special Situations
Situation: I have 20% down payment → Conventional loan (no PMI, lowest total cost)
Situation: I have 3.5% down, credit score 620 → FHA loan (only option)
Situation: I have 5% down, credit score 740 → Conventional loan (PMI removable, better rates)
Situation: I have no down payment, not a veteran → USDA loan (if eligible area) OR save for FHA 3.5%
Situation: I’m self-employed with variable income → FHA loan (more lenient income documentation)
How to Apply (Step-by-Step)
Step 1: Check Your Credit Score (Free)
Where:
- AnnualCreditReport.com (official, free)
- Credit Karma (free, updates weekly)
- Your bank/credit card (many offer free scores)
What you need:
- 580+ for FHA, VA
- 620+ for conventional (740+ for best rates)
- 640+ for USDA
Step 2: Calculate How Much You Can Afford
Formula:
Monthly housing payment (P+I+T+I) should be ≤ 28% of gross monthly incomeExample:
- Gross monthly income: $5,000
- Max housing payment: $1,400
- Estimated affordable home: $250,000-$275,000
Use online mortgage calculators to estimate.
Step 3: Get Pre-Approved (Not Just Pre-Qualified)
Pre-qualification: Lender estimates (soft credit check, no verification)
Pre-approval: Lender verifies income, credit, assets (hard credit check, official letter)
Why it matters: Sellers take pre-approval seriously (shows you can actually buy).
Documents needed:
- Last 2 years of tax returns
- Last 2 months of pay stubs
- Last 2 months of bank statements
- ID (driver’s license, passport)
- Authorization to pull credit
Where to apply:
- Local banks and credit unions
- Online lenders (Better.com, Rocket Mortgage)
- Mortgage brokers (compare multiple lenders)
Tip: Apply with 3-5 lenders within 2 weeks (counts as one credit inquiry).
Step 4: Compare Offers
Look at:
- Interest rate
- APR (includes fees, gives true cost)
- Closing costs
- Monthly payment
- Total loan cost over 30 years
Don’t just pick lowest rate—look at total cost including fees.
Step 5: Lock Your Rate
When: After you’re under contract on a home
How long: 30-60 days (enough time to close)
Cost: Sometimes free, sometimes $300-$500
Why: Protects you if rates rise
Step 6: Close on Your Home
Final steps:
- Final walkthrough (ensure property condition)
- Sign loan documents
- Transfer down payment + closing costs
- Receive keys
Total timeline: 30-45 days from offer acceptance to closing
Refinancing: When to Switch Loan Types
FHA → Conventional
When: You reach 20% equity AND credit improves to 700+
Why: Remove lifetime mortgage insurance (saves $50K-$100K)
Process: Refinance into conventional loan (appraisal + closing costs)
Break-even: Usually 2-3 years (closing costs offset by MI savings)
High-Rate → Lower-Rate
When: Rates drop 0.5-1%+ below your current rate
Why: Lower monthly payment and total interest
Process: Rate-and-term refinance (simplest type)
Break-even: Calculate how many months to recoup closing costs
Any Loan → VA
When: You become eligible (enlist, qualify as surviving spouse)
Why: Remove mortgage insurance, lower rate
Process: VA refinance (called “VA streamline” if already VA loan)
Common Mortgage Mistakes
Mistake 1: Not Shopping Around
Why it’s bad: Rates vary by 0.25-0.5% between lenders (costs $20K-$40K over 30 years)
Fix: Get quotes from 3-5 lenders within 2 weeks
Mistake 2: Choosing FHA When Conventional Is Cheaper
Why it’s bad: FHA has lifetime MI (conventional’s PMI is removable)
Fix: If credit is 680+, compare both—conventional is often cheaper
Mistake 3: Ignoring VA Benefits
Why it’s bad: VA loan is the best deal available
Fix: If you’re a veteran, ALWAYS use your VA benefit
Mistake 4: Maxing Out Your Approved Amount
Why it’s bad: You’re house-poor (all income goes to mortgage)
Fix: Aim for 25-28% of gross income, not the 43% maximum
Mistake 5: Not Considering Total Cost
Why it’s bad: Low rate ≠ low cost (factor in all fees and insurance)
Fix: Compare total cost over 30 years, not just monthly payment
Related Articles
Buying your first home? Check out these guides:
- First-Time Homebuyer Complete Guide for College Dropouts - Step-by-step home buying process
- Rent vs Buy Calculator - Decide if buying makes sense
- Closing Costs Explained - Hidden costs of buying
- House Hacking Strategy - Live for free while building equity
The Bottom Line
The best mortgage depends on your situation:
Veterans/Active-Duty: VA loan (no down payment, no MI, lowest rates)
Rural buyers: USDA loan (no down payment, low fees)
Strong credit (700+), 5-20% down: Conventional loan (removable PMI, best long-term cost)
Lower credit (580-699), small down payment: FHA loan (easier to qualify, but higher total cost)
Action plan:
- Check your credit score (today)
- Determine which loan types you qualify for (10 minutes)
- Get pre-approved with 3-5 lenders (this week)
- Compare total costs, not just monthly payments (use calculator)
- Choose the loan with lowest total cost over 30 years
Choosing the right mortgage can save you $50,000-$100,000 over the life of your loan.
Don’t just accept the first offer. Shop around. Compare. Choose wisely.
Your home is the biggest purchase you’ll ever make. Get the financing right.
