How to compare mortgages
Learn more about comparing mortgage loans and rates
When you are buying a house, it can be difficult to understand the different loan types and rates. The jargon can make it confusing to figure out how mortgages work, much less compare loan types and pick the one that’s right for you.
At Freedom Mortgage, we can help you buy a home with a conventional loan, FHA loan, VA loan, or USDA loan. Here are some important things to know about these four types of mortgages!
Compare mortgage eligibility
Most homebuyers can apply for conventional and FHA loans. You’ll need to meet your lender’s credit, income, and financial requirements to get your mortgage application approved but most people are eligible to apply for a mortgage to buy a home with these loans.
VA and USDA loans are different. Only veterans, active-duty military personnel, and surviving spouses are eligible to apply for VA loans. With USDA loans, the location of the house determines if you are eligible to apply. The home must be in an approved rural or suburban area if you want to buy it with a USDA loan.
Just like with other mortgages, you’ll need to meet your lender’s credit, income, and financial requirements to get your application for a VA or USDA loan approved.
Compare property types
The next thing to understand is what kind of house you can buy with the loan. You can buy a primary home – that is, the house where you live most of the time – with conventional, FHA, VA, and USDA loans. The rules are different when you want to buy a vacation home or investment property. You can only buy these types of houses with a conventional loan.
Compare minimum down payments
Conventional and FHA loans require a minimum down payment. You can often get a conventional loan with a down payment as low as 5% of the purchase price while it’s possible to get an FHA loan with a down payment as low as 3.5%.
VA and USDA loans often do not have a minimum down payment. This means if you are approved for a VA or USDA loan, you may be able to buy a house without making a down payment.
Compare minimum credit scores
Conventional loans often can have higher minimum credit score requirements than VA and FHA loans. This means when you have a lower credit score, it may be easier to qualify for a VA or FHA loan. To learn more about Freedom Mortgage’s current minimum requirements, see our article on credit scores to buy a house.
Compare mortgage insurance costs
It’s a good idea to compare the mortgage insurance costs of different loans because these costs can have a big impact on your monthly mortgage payment.
Conventional loans have more flexible mortgage insurance requirements compared to other loans. It is possible to avoid paying for mortgage insurance when you make a down payment of 20% or more with a conventional loan. It is also easier to stop paying for mortgage insurance. Once your home’s equity reaches 20%, you may request your lender cancel your mortgage insurance payments if certain conditions are met. In addition, PMI is often canceled automatically once you’ve reached 22% equity if your mortgage payments are current.
FHA loans are different. First, you’ll pay a one-time "upfront" mortgage insurance premium when you buy a house with an FHA loan. Conventional loans do not have this upfront fee. You’ll also pay monthly mortgage insurance premiums with an FHA loan, and it is more difficult to stop paying for FHA mortgage insurance than it is to stop paying mortgage insurance for conventional loans.
As a result, compare the costs of mortgage insurance when you are choosing between a conventional and FHA loan. Learn more about the differences between conventional and FHA mortgage insurance.
USDA loans have mortgage insurance costs similar to FHA loans. There is both an upfront cost and a monthly payment. Note that these are called "guarantee fees" rather than "mortgage insurance."
VA loans have an upfront mortgage insurance fee called a "funding fee." When you buy a home with a VA loan, you’ll most likely have to pay this fee. There are no monthly funding fee payments with VA loans however, which help make these mortgages more affordable.
Compare mortgage interest rates
For many homebuyers, the interest rate they pay has the most influence on the loan they choose. The higher the interest rate, the more money you will pay in interest over the life of your loan.
When you are comparing mortgage rates, it’s important to understand two things. The first is that the mortgage rates you see advertised may not be the same rate you are offered. That’s because your rate is affected by your credit, income, finances, loan amount, and other factors. You may be offered a rate that is higher or lower than the rates you see advertised. As a result, you’ll want to speak to a lender like Freedom Mortgage to understand the rate you may qualify for.
The second thing to understand is that you’ll want to compare the "annual percentage rates" or "APR" of different mortgages and not only the interest rates. That’s because APR includes costs associated with getting a mortgage, such as lender fees or discount points, and makes it easier to compare different rates in an "apples to apples" way. To learn more, read our article on mortgage rate versus APR.
Compare mortgage refinance options
It’s a good idea to understand your refinance choices when choosing a mortgage. Conventional loan refinances are sometimes called "full document" refinances because you will need to provide a new set of financial documents when you want to lower your interest rate.
FHA, VA, and USDA loans have "streamline" refinancing options. This means you could refinance with less paperwork, which can make lowering your interest rate easier. You can’t change loan types with a streamline refinance. You can only streamline refinance an old FHA loan into a new FHA loan, for example. By refinancing, the total finance charges may be higher over the life of the loan.
Last reviewed and updated March 2023 by Freedom Mortgage Corporation.