Which Mortgage Type Offers the Best Rates – FHA, VA, or Conventional?

FHA vs. VA vs. Conventional: Who is the winner when it comes to the lowest mortgage rates? The answer is … there’s not just one right answer. It depends on what the other inputs are, not the least of which are your unique needs and goals. Let’s break it down so you can choose your winner.

Comparing loan types

Before discussing rates, it’s helpful to outline some of the key differences between Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and Conventional mortgage loans. Notice how their distinct features can make it hard to make an apples-to-apples comparison.

How are mortgage rates determined?

Now let’s talk interest rates. Here are the factors that determine mortgage rates.

Down payment size

A mortgage down payment is the cash you pay upfront toward a property. The remainder is financed into a home loan. A standard for conventional loans is 20 percent, but it’s possible to pay as little as 3 percent down (just know it will require mortgage insurance).

Top takeaway: A higher down payment usually secures a lower rate.

Credit score

Your credit score is a number based on the information in your credit history. The calculation takes into account several factors including how much debt you have, the type of debt, and your repayment history.

Top takeaway: The higher your score, the more responsible a lender sees you at handling debt – often translating into a lower interest rate.

Debt-to-income ratio (DTI)

DTI is a ratio that helps lenders better understand your ability to afford a home based on how much of your income is already used for paying off debt. It’s calculated by dividing your debt payments by your pre-tax income.

Top takeaway: Often, the lower the DTI, the lower the interest rate.

Loan size, term, and type

Mortgages come in many shapes and sizes. A 15-year fixed rate conventional loan for $150,000 is very different from a 5/1 adjustable-rate FHA loan. Rates can increase or decrease with different loan amounts, term lengths, and types (whether they are conventional, jumbo, or government-backed).

Top takeaway: All these variables influence each other. Your lender can suggest an optimal approach for you.

Property location and type

Rates can vary based on geographic area and whether the property is a primary residence, an investment or rental property, or a piece of land. States have different laws that influence interest rates, and a lender may also take into consideration how many foreclosures are in the area.

Top takeaway: The old real estate adage applies: location, location, location. It can pay to research the area where you plan to buy before shopping around for a loan. And be sure your lender knows upfront how you intend to use the property.

Mortgage points

You may choose to buy down your rate through points. This means you’ll pay a one-time, upfront fee in exchange for a lower interest rate. It can take years to pay off the initial expense, so make sure to run the numbers ahead of time to ensure it’s worth it.

Top takeaway: A higher interest rate doesn’t always mean you pay more in the end.

Economic conditions

Many forces affect rates that are outside of your or your lender’s control. Rates will rise and fall over time depending on inflation, the housing market, the state of our economy, and other external factors. 

Top takeaway: While it may make sense to wait out a period of rising interest rates if you can, there’s no such thing as a perfect interest rate. Smart money says work on the factors you can control, like your credit score, DTI, and other financials.

Lender

It’s recommended to shop around for a mortgage because banks, credit unions, and online lenders set their own rates. They can be higher or lower based on the financial institution’s business model. Credit unions usually offer lower rates because they are nonprofits and enjoy significant tax advantages.

Top takeaway: When choosing a lender, think beyond the lowest interest rate. Also think about the relationship you want to have with them. (We make getting to know us easy at our Mortgage Center.)

Final takeaway: Loan type is just one of the many things lenders take into consideration when quoting rates. Truth is, each of the loans may offer the lowest rate at any given time because of the differing factors.

One more time: Interest rate isn’t everything

Don’t let the shine of the lowest rate blind you from looking at all of your options. You can actually pay less for a loan overall, even with a slightly higher rate, if other costs are lower.

For example: A veteran may find that a VA loan offers the lowest 30-year fixed interest rate, but the loan comes with a sizable funding fee. He has a 20 percent down payment and can avoid PMI, so a conventional loan with a slightly higher rate is actually the better option to pay less in the long run.

What does all this mean for you?

There isn’t a perfect formula for finding the best rate. It requires knowing your situation, understanding different loan types, and being prepared to crunch the numbers when you shop around for quotes.