Comparing FHA, VA, USDA, and Conventional Loans (2023)

Conventional Loans, FHA Loans, VA Loans, USDA Loans… are you confused about your mortgage options? Choosing a mortgage loan can feel overwhelming. Every option has its criteria and advantages, from credit score requirements to the size of your down payment and closing costs. The option you choose could mean the difference in the home you qualify for and how much it will cost you over the life of the loan.

This guide will briefly overview the four loan types so you can narrow your search before you contact a specialist about your home mortgage needs.

There are Four Common Types of Mortgage Loans in Arizona

There are a staggering number of loan terms and offerings, but most fall under one of four categories.

• Conventional loans
• Federal Housing Administration (FHA) loans
• Department of Veterans Affairs (VA) home loans
• United States Department of Agriculture (USDA) Loans

Each type of mortgage loan has its benefits and limitations based on the guidelines they follow. These guidelines affect everything from who qualifies for the loan to the appraisals on the house.

What is a Conventional Loan?

A conventional loan is a loan option that is not backed by a government entity. It is the most common of the four loans, making up over 80% of loans closed in 2021. 

Conventional loans can be divided into two broad categories

• A conforming loan follows the housing loan guidelines of the Federal Home Loan Mortgage Corporation (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). This ensures that one of these giants can purchase the loan in the secondary market should the lender choose not to keep it in their portfolio. This added security allows the lender to offer better rates to the home buyer.
• A non-conforming loan does not perfectly follow Fannie Mae or Freddie Mac’s guidelines. This can allow a buyer with a lower credit score or higher than average debt to income (DTI) to qualify for a house, but the rates tend to be higher to account for the higher risk for the lender.

The key trait of conventional loans is their flexibility. There is no standard for all conventional loan options other than those for conforming loans. Even appraisal requirements vary from lender to lender. 

In general, the higher your credit score is and the lower your Debt to Income Ratio, the better your chances of qualifying for a loan offer that can save you tens of thousands of dollars over the life of the loan. You can find our guide to conventional loans in 2023 here.

Loan Limits in Arizona

Up to $726,200 for conforming loans on a single-family unit. There are no hard limits on non-conforming loans if the buyer has the ability to pay. Unconventional loans that exceed the loan limit are known as Jumbo Loans and have stricter requirements.

Down Payment

3-5% on conforming loans, expect 10-20% on non-conforming loans. Paying 20% down can open you to better rates and the ability to drop private mortgage insurance.

Mortgage Insurance

If paying less than 20% down, the buyer may be required to purchase private mortgage insurance.

Credit Rating

660+ with more favorable terms in the mid to upper 700’s. Conforming loans can go as low as 580 under strict conditions.

Debt to Income Ratio

Conventional loans require intense scrutiny of your debts and income. Stable employment, income, and a low debt-to-income ratio are a must. The target is below 36% debt, though some conforming loan programs will allow up to 50%.

What is an FHA Loan?

The Federal Housing Administration insures an FHA loan. Their primary goal is to help low to moderate-income families become homeowners. It is popular with first-time homebuyers and people who might not meet the credit scores or down payments for a conventional loan.

To qualify for an FHA Loan, you must fulfill the following:

• The home must become the borrower’s primary residence.
• The home must be appraised and meet HUD’s Minimum Property Standards.
• While the borrower does not need to be a first-time homeowner, other owned homes must have a mortgage of less than 85% of the home value, and an undue hardship must exist that prevents them from becoming a primary residence.
• Show a two-year history of honoring debts.
• Show a two-year history of stable income.

Loan Limits in Arizona

$472,030 for a single-family unit

Down Payment

3.5% if the borrower meets the full eligibility requirements. 10% if they have a credit rating of 500-579.

Mortgage Insurance

Buyers must pay two kinds of mortgage insurance. The first is the upfront MIP loan paid at closing. This usually equates to 1.75% of the total value of the loan. The second is the annual MIP payment. Despite the name, it is paid monthly and held in an escrow account in case you default on the loan. The rates vary based on the lender and your financial situation. A few circumstances will allow you to drop mortgage insurance after eleven years. In many cases, you will need to keep mortgage insurance through the life of the loan.

Credit Rating:

580+ to qualify for low down payments. The borrower may still qualify if their credit rating is 500-579, and they can pay at least 10% down.

Debt to Income Ratio

The Debt to Income Ratio is divided into two parts. The total mortgage (front-end ratio), including the HOA fees, property taxes, mortgage insurance, and homeowners insurance, should not exceed 31% of your income. The other covers all your monthly fixed payments like utilities and consumer debts. This back-end ratio should not exceed 41% of your gross income.

What is a VA Loan?

Loans by the Department of Veterans Affairs (VA) are designed to help retired/active military personnel and their spouses purchase a home. You will need to acquire a VA home loan Certificate of Eligibility (COE) through your lender, VA Loan Eligibility Center, or the eBenefits site before you can close on a loan.

To qualify for a VA home loan, you must fulfill at least one of the following requirements:

• Served for at least 90 consecutive days during active wartime
• Served at least 181 consecutive days during peacetime
• For at least six years you served in National Guard or Military Reserves
• Your spouse died in the line of duty or due to service-related disabilities.

VA loans come with several benefits, including no down payment or mortgages insurance premiums. You may also qualify for lower average interest rates and closing costs.

Loan Limits in Arizona

A borrower can borrow up to the maximum conventional conforming loan limit, or $726,200, for a single-family unit. If you have your full VA loan entitlement, there is no loan limit past what lenders are willing to offer.

Down Payment: No Down Payment
Mortgage Insurance: ot required for a VA loan

Credit Rating: Set by the Lender. Most prefer a score of 620 or higher.
Debt to Income Ratio: Set by the Lender. Most prefer less than 41%.

What is a USDA Loan?

The United States Department of Agriculture insures a USDA loan through approved lenders. The USDA loan, also known as the Section 502 loan program, is designed to help low-income residents to purchase a home in rural areas.

There are two types of USDA home purchase loans. The Guaranteed USDA loan is attained through an approved lender, while the USDA Direct Loan comes directly from the government.

Here are a few things to expect when you apply for a USDA loan:

• The home must be in an eligible rural area and become the primary residence
• It must be a non-income-producing property
• The property can not have an in-ground swimming pool
• Buyer must be a US citizen or permanent resident
• Household income must not exceed 115% of the area’s median income
• Must prove income. This can be one year of traditional employment, two years of self-employment, or two years of seasonal income.

Loan Limits in Arizona

Loan limits depend on the size of the family. You can receive up to $103,500 for a family of 1-4 or $136,600 for a family of 5-8. If the family exceeds eight people, the loan maximum is $136,600 + 8% per person.

Down Payment: Zero-down payment on both
Mortgage Insurance

A USDA loan does not require mortgage insurance, but it does have fees to protect the lender from default. These include a 1% loan guarantee fee and an annual fee.

Credit Rating: 640 is an ideal credit score to qualify. It is possible to attain a direct loan with a low to no credit history. You must show ability, willingness to pay, and a history of on-time rental payments or other non-traditional credit.
Debt to Income Ratio: No more than 41% for both. You may still qualify if you can show proof of meeting all your financial obligations with more than a 41% DTI.

Which Type of Loan is Right For Me in Arizona?

There is no universal loan that fits everyone perfectly. Even if you qualify for a USDA, FHA, or VA loan, you could still get better terms in a conventional loan if you have a high credit score or can make a large down payment. 

A loan specialist can help you review your unique financial situation and help you find your best option. Even if you do not think you qualify for a specific loan, our specialist can tell you more than we cover in this overview.

Let Agave Experts Help You Choose Between Conventional, FHA, VA, and USDA Loan Options.

If you need help determining which mortgage loan is right for your house hunt in Arizona, let us help! We believe in a “Client first” approach to delivering the services and lending options that fit your financial situation. We even communicate on your behalf with lenders to ensure you get the best deal possible! Contact us today for a consultation.