First-Time Home Buyer Loans: FHA, Conventional 97, USDA and VA Side by Side

Real-world analogy

What is it?

Most first purchases in the US are financed by one of four loan types. FHA loans are insured by the Federal Housing Administration and are built for weaker credit and small down payments. Conventional loans are not government-insured; the low-down-payment versions backed by Fannie Mae and Freddie Mac go as low as 3% down. USDA loans are guaranteed by the Department of Agriculture for eligible rural and small-town areas, with no down payment required. VA loans are guaranteed by the Department of Veterans Affairs for eligible service members, veterans and some surviving spouses, also with no down payment required. Each one carries a different insurance or fee structure, and that structure — not the interest rate alone — is usually what decides the cheapest option.

Real-world relevance

The practical difference shows up as a monthly number. FHA charges an upfront mortgage insurance premium of 1.75% of the base loan amount, which is normally financed into the loan, plus an annual premium collected monthly. Under FHA's rules, when the loan-to-value ratio is above 90% at origination, that annual premium stays for the life of the loan — the only way out is to refinance. Conventional private mortgage insurance behaves in the opposite way: the Homeowners Protection Act of 1998 gives you the right to request cancellation when the balance reaches 80% of the original value, and requires automatic termination at 78%, provided you are current on payments. Two borrowers with identical rates can have very different ten-year costs purely because of that one difference.

Key points

• FHA buys you a lower credit bar, and charges for it — FHA Handbook 4000.1 sets a minimum decision credit score of 580 for the 3.5% minimum down payment, and 500-579 with 10% down. In exchange you pay 1.75% upfront mortgage insurance plus an annual premium. It is the loan that says yes to thinner credit files — and the premium is the price of that yes.
• Conventional 97 means 3% down with cancellable insurance — Fannie Mae's HomeReady and Freddie Mac's Home Possible allow a 3% down payment for qualifying borrowers, and both have income limits generally set at 80% of area median income. Conventional loans usually want a credit score around 620 or higher. The insurance is private, priced off your credit and down payment, and it ends — which is the whole argument for this route.
• USDA: zero down, but the map and the income cap decide — USDA's Single Family Housing Guaranteed Loan Program requires no down payment, but the property must be in an eligible rural area on USDA's own eligibility map, and household income generally cannot exceed 115% of the area median income. It carries its own upfront guarantee fee and an annual fee. Check the map before you fall in love with a house.
• VA: zero down, no monthly mortgage insurance, one funding fee — If you have VA entitlement, this is usually the strongest option available to any first-time buyer. No down payment requirement, no monthly mortgage insurance at all, and since the Blue Water Navy Vietnam Veterans Act took effect on 1 January 2020, no VA loan limit for borrowers with full entitlement. There is a one-time funding fee, waived for many veterans receiving VA disability compensation.
• ⚠️ Common misconception: 'The loan with the lowest rate is the cheapest loan' — The rate is one of four numbers. The others are the upfront fee added to your balance, the monthly insurance premium, and whether that premium ever ends. An FHA loan at a slightly lower rate with life-of-loan insurance can cost more over ten years than a conventional loan at a higher rate whose PMI disappears in year six. Compare total cost over the years you expect to stay, not the headline rate.
• Loan type and assistance program are two separate choices — Down payment assistance, state Housing Finance Agency programs and mortgage credit certificates sit on TOP of one of these four loans. You are not choosing between 'an FHA loan' and 'a first-time buyer program' — you will usually have both, and the program will specify which loan types it can be paired with.

Code example

$300,000 PURCHASE - SAME HOUSE, FOUR DOORS
===========================================
(Structure is real; rates and PMI pricing
 change constantly. Use YOUR Loan Estimate
 for real numbers.)

FHA - 3.5% DOWN
  Down payment ............ $ 10,500
  Base loan ............... $289,500
  Upfront MIP 1.75% ....... $  5,066  (financed)
  Loan amount ............. $294,566
  Annual MIP .............. monthly, and with
                            LTV > 90% at start,
                            it lasts the life
                            of the loan
  Credit floor ............ 580 for 3.5% down

CONVENTIONAL 97 - 3% DOWN
  Down payment ............ $  9,000
  Loan amount ............. $291,000
  Upfront insurance ....... none
  Monthly PMI ............. priced on credit
                            + LTV
  PMI ENDS ................ request at 80% LTV,
                            automatic at 78%
                            (HPA 1998)
  Credit floor ............ typically ~620
  Income cap .............. HomeReady /
                            Home Possible:
                            generally 80% AMI

USDA GUARANTEED - 0% DOWN
  Down payment ............ $      0
  Loan amount ............. $300,000 + upfront
                            guarantee fee
  Monthly ................. annual fee
  Gates ................... property on the
                            USDA eligibility
                            map; income
                            generally <= 115%
                            of area median

VA - 0% DOWN
  Down payment ............ $      0
  Monthly mortgage ins. ... NONE
  One-time funding fee .... % of loan, set by
                            VA's current table;
                            often waived with
                            VA disability comp
  Gates ................... entitlement +
                            Certificate of
                            Eligibility

THE QUESTION THAT DECIDES IT
  Not 'which rate is lowest' but:
  1. Which doors am I even eligible for?
  2. Does the mortgage insurance ever end?
  3. What is the TOTAL cost over the years
     I actually expect to live here?

Line-by-line walkthrough

1. 1. FHA: notice the loan amount is LARGER than the price minus the down payment. The 1.75% upfront premium is normally financed, so you start owing more than you borrowed to buy. That is the trade for a 580 credit floor.
2. 2. FHA again: the annual premium is the part that bites quietly. Above 90% loan-to-value at origination it runs for the life of the loan, so the only exit is a refinance — which means a new set of closing costs and whatever rate exists on that future day.
3. 3. CONVENTIONAL 97: 3% down, no upfront insurance charge, and PMI that terminates by law. The Homeowners Protection Act gives you a request right at 80% of original value and automatic termination at 78%. This is the single biggest structural advantage of the conventional route.
4. 4. CONVENTIONAL trade-off: it wants a stronger credit file, typically around 620, and the HomeReady/Home Possible versions come with income limits generally set at 80% of area median income. A higher earner may still use a standard conventional loan — just without those particular program terms.
5. 5. USDA: the down payment is zero, and the two gates are the map and the income cap. Both are checkable in ten minutes before you tour a single house, which makes this the fastest option to rule in or out.
6. 6. VA: no down payment AND no monthly mortgage insurance is a combination nothing else offers. The cost is concentrated in one funding fee, which is waived for many veterans receiving disability compensation. If you have entitlement, price this first.
7. 7. THE DECISION: work top-down. Eligibility first, because it eliminates most of the table. Then the insurance structure. The interest rate is the LAST tiebreaker, not the first filter.

Spot the bug

Buyer's reasoning: 'FHA is the first-time buyer loan, so that is what I am getting. My credit is 680 and I have 5% saved, but FHA is the one designed for people like me. I will refinance out of the mortgage insurance in a couple of years anyway.'

Explain like I'm 5

Fun fact

Hands-on challenge

More resources

• FHA Single Family Housing Policy Handbook 4000.1 (HUD)
• VA home loan programs and eligibility (VA)
• USDA Single Family Housing Guaranteed Loan Program (USDA Rural Development)
• What is private mortgage insurance (PMI) and when can I cancel it? (CFPB)