Conventional vs. FHA vs. VA Loans: Costs, Rules & Payment Comparison

1. What makes each loan type different

The main difference is how lender risk is handled. Conventional loans are not insured or guaranteed by the federal government. FHA loans are insured by the Federal Housing Administration. VA loans are guaranteed by the U.S. Department of Veterans Affairs for eligible borrowers.

That difference affects qualification rules, down payment requirements, mortgage insurance, fees, and pricing. A borrower who looks expensive under one loan program may look more competitive under another. That is why comparing loan types can be just as important as comparing lenders.

Government-backed loans can help lenders approve borrowers who may not fit a standard Conventional profile. The tradeoff is that the program may include specific insurance premiums, funding fees, property standards, or eligibility rules.

Loan type is not entirely a preference decision. Eligibility, credit score, debt-to-income ratio, down payment, property type, occupancy, local loan limits, and lender overlays can all affect what is available. Use this guide as a comparison framework, then model the actual quotes you receive.

2. Conventional loans: how they work

A Conventional loan is a mortgage that is not insured or guaranteed by the federal government. Many Conventional loans are also “conforming,” meaning they meet guidelines used by Fannie Mae and Freddie Mac. These guidelines include credit, income, documentation, property, and loan limit rules.

Conforming loan limits change annually and can vary by county. In many areas, a loan above the conforming limit is considered a jumbo loan, which may have different qualification standards and pricing.

Typical Conventional loan features

• Credit score: Many lenders look for at least 620, but better scores usually help with pricing.
• Down payment: Some programs allow as little as 3% down, while many buyers use 5%, 10%, or 20% down.
• Mortgage insurance: PMI is usually required with less than 20% down.
• Property flexibility: Conventional appraisals can be more flexible than FHA appraisals in some situations, though the home still needs to meet lender standards.
• Best fit: Often useful for borrowers with stronger credit, stable income, and enough down payment to manage or avoid PMI.

Private Mortgage Insurance (PMI)

PMI protects the lender if the borrower defaults. It does not protect the borrower. On a Conventional loan, PMI is commonly required when the down payment is less than 20%.

PMI cost depends on credit score, loan-to-value ratio, loan type, and insurer pricing. In this article's example, a $285,000 Conventional loan uses an estimated PMI cost of $202 per month. Actual PMI can be higher or lower.

One advantage of Conventional PMI is that it can usually be removed later. Borrowers may be able to request PMI cancellation once the loan balance reaches 80% of the home's original value, and automatic termination may apply later under federal rules if the loan is current and eligible.

PMI removal can change the long-term cost comparison. A Conventional loan may look more expensive early on but become more competitive once PMI is removed. For more detail, read What Is PMI and How Do You Remove It?.

3. FHA loans: how they work

FHA loans are insured by the Federal Housing Administration. They are often used by buyers who have limited savings, lower credit scores, or higher debt-to-income ratios than a Conventional lender may prefer.

Typical FHA loan features

• Credit score: FHA guidelines allow 3.5% down with a qualifying score of 580 or higher. Scores from 500 to 579 may require 10% down, subject to lender approval.
• Down payment: 3.5% is common for qualifying borrowers.
• Gift funds: FHA may allow eligible gift funds for down payment and closing costs.
• Mortgage insurance: FHA loans require both upfront and annual mortgage insurance premiums.
• Property standards: The home must meet FHA property standards, which can matter for fixer-uppers or homes with deferred maintenance.
• Best fit: Often useful for borrowers who need more flexible credit or down payment requirements.

FHA mortgage insurance

FHA mortgage insurance has two parts:

• Upfront Mortgage Insurance Premium (UFMIP): A one-time premium that many borrowers finance into the loan instead of paying in cash at closing.
• Annual Mortgage Insurance Premium (MIP): An ongoing premium usually paid monthly as part of the mortgage payment.

In this article's $300,000 example, the FHA borrower puts 3.5% down, leaving a base loan amount of $289,500. An estimated 1.75% upfront MIP adds about $5,066 if financed, bringing the starting loan balance to about $294,566.

The example also uses an estimated annual MIP of 0.55%, or about $133 per month at the start of the loan. FHA mortgage insurance rules can vary by loan term, loan amount, loan-to-value ratio, and program changes.

A key difference from Conventional PMI is that FHA annual MIP may last much longer. For many 30-year FHA loans with less than 10% down, annual MIP lasts for the life of the loan unless the borrower refinances into another loan type later.

FHA can be a practical path into homeownership, but borrowers should understand how upfront and monthly MIP affect the loan balance, monthly payment, and long-term cost.

4. VA loans: how they work

VA loans are guaranteed by the U.S. Department of Veterans Affairs and made by private lenders. They are available only to eligible borrowers, including many veterans, active-duty service members, certain National Guard and Reserve members, and qualifying surviving spouses.

Typical VA loan features

• Down payment: Eligible borrowers may be able to buy with no down payment.
• Monthly PMI: VA loans do not require monthly private mortgage insurance.
• Funding Fee: A one-time VA Funding Fee may apply unless the borrower qualifies for an exemption.
• Credit score: VA does not set one universal minimum credit score, but individual lenders may have their own minimums.
• Occupancy: VA loans are generally for primary residences, not investment properties.
• Best fit: Often worth modeling for eligible borrowers, especially when cash savings or PMI avoidance matter.

The VA Funding Fee

The VA Funding Fee helps support the VA loan program. Many borrowers finance the fee into the loan, which reduces cash needed at closing but increases the starting loan balance.

In this article's example, the VA borrower uses no down payment and has a first-use Funding Fee assumption of 2.15%. On a $300,000 purchase, that adds $6,450 if financed, creating an estimated starting loan balance of $306,450.

Some borrowers are exempt from the VA Funding Fee, including certain borrowers receiving VA disability compensation and some qualifying surviving spouses. If an exemption may apply, it should be verified before closing.

VA loans can be highly competitive because they may combine no down payment with no monthly PMI. Still, the right comparison depends on the Funding Fee, time in the home, rate quotes, and whether the borrower qualifies for an exemption.

5. Side-by-side example on a $300,000 home

The table below uses simplified assumptions to compare estimated costs on a $300,000 purchase. The purpose is not to predict an exact quote, but to show how down payment, insurance, funding fees, and interest rates can change the monthly payment.

In this example, VA has the lowest estimated monthly payment even though it has the largest starting loan balance. That happens because the VA example has no monthly PMI or MIP.

FHA has a lower estimated monthly payment than Conventional in this scenario because the FHA example uses a lower interest rate and lower monthly insurance estimate. That does not mean FHA is always cheaper. If Conventional PMI can be removed later, or if the FHA borrower keeps the loan for a long time without refinancing, the long-term comparison may change.

Cash needed at closing can also change the decision. A borrower with strong income but limited savings may care more about upfront cash than lifetime cost. A borrower with more savings may prefer a structure that reduces long-term fees.

These are simplified estimates. Actual rates, PMI, MIP, closing costs, tax amounts, insurance premiums, seller credits, and lender fees can vary. Use the Mortgage Calculator to model your own numbers.

6. How to decide which loan type may fit

If you have VA eligibility, model VA alongside the others

VA loans can be very competitive for eligible borrowers because they may require no down payment and no monthly PMI. That can reduce both upfront cash needs and monthly payment. Still, it is worth comparing VA against Conventional if the borrower has a large down payment, a short expected time in the home, or a Funding Fee exemption question.

If credit score or savings are limited, compare FHA carefully

FHA may be useful when a borrower has a lower credit score, limited savings, or a higher debt-to-income ratio. The tradeoff is mortgage insurance. FHA can help a borrower qualify, but the upfront and monthly MIP should be included in the real cost comparison.

If credit is strong and 20% down is available, Conventional may be simpler

With strong credit and 20% down, a Conventional loan may avoid monthly PMI and government program fees. That can make it simple and cost-efficient. But borrowers should still compare actual quotes, because rate and fee differences can vary by lender.

If credit is strong but down payment is below 20%, compare PMI vs. MIP

This is one of the most common decision points. A borrower with solid credit and less than 20% down may be able to choose between Conventional with PMI and FHA with MIP. Conventional may become cheaper over time if PMI is removed. FHA may be easier to qualify for or cheaper upfront in some cases.

If the home needs repairs, property standards matter

FHA and VA appraisals may flag certain property issues that need to be corrected before closing. Conventional loans can sometimes be more flexible, depending on the property and lender. For older homes or fixer-uppers, the loan type can affect whether the deal closes smoothly.

A useful comparison should include more than the monthly payment. Look at cash needed to close, mortgage insurance, upfront fees, rate, expected time in the home, refinance likelihood, and whether the borrower values liquidity or lower long-term cost more.

7. Common mistakes when comparing loan types

• Comparing only the interest rate. A lower rate with higher insurance costs can still produce a higher all-in payment or higher long-term cost.
• Ignoring how long you plan to keep the loan. A loan that is cheaper in year one may not be cheaper over 10 or 30 years.
• Assuming FHA is always the low-down-payment option. Conventional low-down-payment programs exist, but they may have different eligibility rules, PMI costs, and income limits.
• Forgetting that Conventional PMI may be removable. PMI removal can change the long-term comparison, especially if the home appreciates or the borrower pays down principal faster.
• Not checking VA eligibility. Some borrowers assume they do not qualify before verifying their Certificate of Eligibility or asking a lender familiar with VA loans.
• Financing upfront fees without considering the effect on balance. FHA upfront MIP and VA Funding Fees are often financed, which lowers cash needed at closing but increases the loan balance.
• Getting only one quote. Lenders can price Conventional, FHA, and VA loans differently. Comparing multiple lenders and multiple loan types gives a clearer picture.

Before closing, it also helps to understand the documents that explain loan costs. Read How to Read a Loan Disclosure for a breakdown of the numbers lenders are required to show.

8. Frequently asked questions

What is the main difference between Conventional, FHA, and VA loans?

Conventional loans are not insured or guaranteed by the federal government. FHA loans are insured by the Federal Housing Administration and are often used by borrowers with lower credit scores or smaller down payments. VA loans are guaranteed by the Department of Veterans Affairs and are available only to eligible service members, veterans, and qualifying surviving spouses.

Which loan type usually has the lowest down payment?

VA loans may require no down payment for eligible borrowers. FHA loans commonly allow 3.5% down for borrowers with qualifying credit. Some Conventional programs allow as little as 3% down, but eligibility rules and pricing can vary.

Can FHA mortgage insurance be removed?

For many FHA loans with less than 10% down, annual mortgage insurance lasts for the life of the loan. Borrowers often refinance into a Conventional loan later if they qualify and have enough equity. FHA rules can vary by loan term, down payment, and case date.

Do VA loans have PMI?

VA loans do not require monthly private mortgage insurance. Most VA borrowers pay a one-time VA Funding Fee unless they qualify for an exemption, such as certain disability-related exemptions.

Which loan type is best?

There is no single best loan type for every borrower. Conventional loans may fit borrowers with strong credit and larger down payments. FHA loans may fit borrowers with limited savings or lower credit scores. VA loans may be especially useful for eligible borrowers because they can offer no down payment and no monthly PMI.