Conventional vs. FHA vs. VA vs. USDA Loans, Explained

Almost every out-of-state buyer we work with arrives with the same blind spot. They've researched neighborhoods for months and the loan for about ten minutes. Then a lender mentions 'FHA versus conventional,' or a friend says 'you should have gone USDA,' and suddenly there's a vocabulary nobody handed them. So here's the plain-English version. There are four main loan types most people buying a home in Middle Tennessee will ever consider — conventional, FHA, VA, and USDA — and they differ in who qualifies, how little you can put down, and what the mortgage insurance looks like. Understanding those three differences is most of the battle.

One thing up front: we're a real estate team, not your lender. We don't originate loans, set rates, or approve anyone. What we can do is make sure you walk into the lender conversation already knowing the landscape, so you can ask sharp questions and recognize a good fit when you see one. The actual numbers — your rate, your payment, your insurance — come from a licensed lender on a Loan Estimate, and a few of the figures below are program rules that get updated periodically, so treat the specific percentages as a snapshot to confirm current, not gospel for all time. We've cited the official source for each so you can check it yourself.

The two big questions every loan type answers

Before the four programs, it helps to know what actually separates them. Two questions do most of the work. First: is the loan government-backed or not? FHA, VA, and USDA loans are insured or guaranteed by a federal agency, which lets lenders offer easier terms because the government absorbs some of the risk. Conventional loans aren't government-backed; they follow guidelines set by Fannie Mae and Freddie Mac. Second: what does the mortgage insurance look like? When you put down less than 20%, lenders want protection against default. Each program handles that protection differently, and it's often the single biggest cost difference between two loans with the same rate. Keep those two questions in mind and the rest falls into place.

Conventional loans: the default path for most buyers

A conventional loan is the standard, non-government mortgage. It conforms to the guidelines of Fannie Mae and Freddie Mac — the two entities that buy most mortgages — which is why a conventional loan within the limits is also called a 'conforming' loan. There's no special eligibility group; conventional is open to anyone who qualifies on credit, income, and down payment. It's the most common loan type, and for buyers with solid credit and some savings, it's frequently the most flexible.

Down payment and the 20% myth

You do not need 20% down for a conventional loan. That's the most persistent myth in home buying. Many conventional programs allow as little as 3% down for a primary residence — Fannie Mae's HomeReady and Freddie Mac's Home Possible are two examples aimed at lower-down-payment buyers, and standard conventional programs commonly go to 3–5%. What 20% actually buys you is freedom from mortgage insurance, which is a different thing entirely.

How conventional mortgage insurance (PMI) works — and ends

When you put down less than 20% on a conventional loan, you pay private mortgage insurance (PMI), typically a monthly add-on. The crucial difference from FHA: PMI is temporary and cancelable. Under the federal Homeowners Protection Act, you can request that your servicer cancel PMI once your loan balance reaches 80% of the home's original value, and the servicer must automatically terminate it when the balance is scheduled to reach 78% of original value, as long as you're current on payments. There's also a midpoint rule — PMI ends the month after you reach the halfway point of your loan's amortization schedule. The Consumer Financial Protection Bureau lays all three out plainly. That cancelability is conventional's quiet advantage: build 20% equity and the insurance simply goes away, lowering your payment.

Conforming loan limits

Conventional conforming loans cap out at a limit set each year by the Federal Housing Finance Agency. For 2025, the baseline limit for a one-unit home in most of the country — which includes Middle Tennessee counties like Davidson, Sumner, Wilson, and Williamson — is $806,500. Borrow above the limit and you're into 'jumbo' loan territory, which has its own underwriting. The FHFA resets this figure annually, so confirm the current year's number with your lender.

FHA loans: built for lower credit scores and smaller down payments

FHA loans are insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. The whole point of the program is accessibility — it's designed so buyers with lower credit scores or thinner savings can still qualify. You don't have to be a first-time buyer to use an FHA loan, and there's no income cap. Plenty of buyers relocating to the Nashville area use FHA simply because the credit and down-payment requirements are more forgiving than conventional.

Down payment and credit score

FHA's headline feature is the 3.5% minimum down payment, available to borrowers with a credit score of 580 or higher, per HUD's published requirements. If your score falls in the 500–579 range, you can still qualify, but the minimum down payment rises to 10%. That lower credit threshold is the main reason a buyer might choose FHA over conventional — conventional underwriting generally rewards stronger credit, while FHA was purpose-built to widen the door.

FHA mortgage insurance: the catch you need to understand

Here's where FHA differs most from conventional, and it's the part buyers most often miss. FHA loans carry two layers of mortgage insurance, and they're required regardless of down payment. First, an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, usually rolled into the loan. Second, an annual mortgage insurance premium (MIP) paid monthly — for most borrowers that rate is 0.55% per year, following a HUD reduction in 2023 (Mortgagee Letter 2023-05) that cut it from 0.85%.

The bigger catch is duration. Unlike conventional PMI, FHA's annual MIP generally cannot be canceled by building equity. If you put down less than 10%, you pay MIP for the entire life of the loan. If you put down 10% or more, MIP drops off after 11 years. For many buyers, the standard way out of FHA mortgage insurance is to refinance into a conventional loan once they have enough equity — that's a normal, expected move, not a failure. The takeaway: FHA can be easier to get into, but the insurance is stickier and worth pricing against a conventional option side by side.

VA loans: the strongest terms, reserved for those who earned them

VA loans are guaranteed by the U.S. Department of Veterans Affairs and are available to eligible veterans, active-duty service members, National Guard and Reserve members, and certain surviving spouses. Eligibility is established through a Certificate of Eligibility (COE) based on your service. If you qualify, the VA loan is, on the pure mechanics, often the best deal in American home financing, and we see eligible buyers use it regularly in the Nashville area.

Zero down and no monthly mortgage insurance

Two features make the VA loan stand out. First, eligible borrowers can finance up to 100% of the purchase price — no down payment required. Second, and this is the one that quietly saves the most money over time: VA loans require no monthly mortgage insurance at all. No PMI, no MIP. The VA's own guidance states the program 'doesn't require down payments or monthly mortgage insurance.' Compare that to an FHA buyer paying MIP for the life of the loan and the long-run difference is substantial.

The VA funding fee

In place of monthly insurance, the VA charges a one-time funding fee, which can be rolled into the loan. For a purchase, the rate depends on your down payment and whether it's your first VA loan. Per the VA's published schedule (effective April 7, 2023): first use with less than 5% down is 2.15%; first use with 5% or more down is 1.5%; first use with 10% or more down is 1.25%. Subsequent use with less than 5% down rises to 3.3%, while subsequent use at 5% or 10%+ down stays at 1.5% and 1.25% respectively. Confirm the current schedule on VA.gov, as the VA can update it.

One detail that saves many veterans real money: the funding fee is waived entirely for certain borrowers — including those receiving VA compensation for a service-connected disability, those eligible for such compensation, surviving spouses receiving Dependency and Indemnity Compensation, and service members with a qualifying Purple Heart status before closing. If any of those apply to you, the VA loan's biggest cost can disappear. Ask your lender to confirm your exemption status with your COE.

USDA loans: zero down, but tied to geography and income

USDA loans are guaranteed by the U.S. Department of Agriculture's Rural Development program (formally the Section 502 Single Family Housing Guaranteed Loan Program). They're the dark-horse option a lot of buyers have never heard of, and for the right buyer in the right location, they're outstanding — no down payment required, 100% financing. The trade-off is that two boxes have to be checked: where the home is, and how much you earn.

The location requirement

The property must be in a USDA-designated eligible rural area. 'Rural' here is broader and more generous than it sounds — it doesn't mean a working farm in the middle of nowhere. Many outlying suburban and small-town areas qualify, including pockets of the counties ringing Nashville. As a general rule, the dense urban core of Nashville won't qualify, but communities farther out in counties like Sumner, Wilson, and Robertson often have eligible areas. Because eligibility is drawn at the property level and the maps are redrawn periodically, the only reliable way to know is to check a specific address against the USDA's official eligibility map. Don't rule a home in or out based on its town name alone — check the actual parcel.

The income requirement

USDA is designed for low- and moderate-income households, so there's an income ceiling: your household income generally cannot exceed 115% of the area median income for the location, which varies by county and household size. This is the opposite of FHA, which has no income cap. The home must also be your primary residence. If you're under the income limit and looking in an eligible area, USDA's combination of zero down and a relatively low guarantee fee is hard to beat.

USDA fees

USDA's version of mortgage insurance is its guarantee fee, and it's comparatively light. There's an upfront guarantee fee of 1% of the loan amount, which can be financed into the loan, plus an annual fee of 0.35% of the remaining balance, paid monthly. Those rates are set by USDA Rural Development and can change in future fiscal years, so verify the current figures. Even with the fees, the math often works out favorably for eligible rural buyers because there's no down payment to save for.

Side by side: the quick comparison

Here's the whole picture in one place. Use it as a starting map, then let a lender run your actual numbers.

• •Conventional — Who: anyone who qualifies on credit/income. Down payment: as low as 3%. Insurance: PMI when under 20% down, but it cancels at 78–80% equity. Best when: you have decent credit and want insurance that eventually goes away.
• •FHA — Who: anyone, no income cap, no first-time requirement. Down payment: 3.5% with a 580+ score (10% for 500–579). Insurance: 1.75% upfront plus 0.55% annual MIP, often for the life of the loan unless you put 10% down (then 11 years) or refinance out. Best when: your credit or savings make conventional tough.
• •VA — Who: eligible veterans, active-duty, Guard/Reserve, certain surviving spouses. Down payment: 0%. Insurance: none — no monthly MI at all; a one-time funding fee instead (waived for many disabled veterans). Best when: you qualify, period. Often the strongest terms available.
• •USDA — Who: low-to-moderate income buyers in eligible rural areas (income at or under 115% of area median). Down payment: 0%. Insurance: 1% upfront guarantee fee plus 0.35% annual fee. Best when: the home is in an eligible area and you're under the income limit.

How buyers actually choose

In practice, the decision is less about picking a favorite and more about matching your situation to the programs you qualify for. If you've served, the VA loan is almost always worth pricing first because of the no-down-payment, no-monthly-insurance combination. If your target home sits in an eligible area and your income fits, USDA's zero-down structure deserves a hard look. If your credit or savings are still building, FHA opens the door. And if you have solid credit and some down payment, conventional often wins the long game because the mortgage insurance is temporary. Many buyers genuinely qualify for two or three of these — which is exactly why running them side by side with a lender beats guessing.

A few honest caveats. Rates and approval depend on the lender and on you, not on the program label alone — two lenders can quote the same loan type differently, which is why shopping more than one lender is one of the highest-return moves a buyer can make. The program rules and fee percentages above are set by federal agencies and updated periodically, so confirm the current figures before you lean on them. And the 'best' loan isn't the one with the lowest down payment or the catchiest pitch; it's the one with the lowest true cost over the years you'll actually own the home. That's a calculation, and it's worth doing.

Where we fit in

We can't tell you which loan to take — that's your lender's job, and choosing the right lender is its own decision. What we can do is help you think through how each option interacts with the homes and areas you're targeting in Middle Tennessee, point you toward whether USDA eligibility is even on the table for the neighborhoods you like, and translate the lender's Loan Estimate into plain English so you understand what you're signing. If you're relocating to the Nashville area or Sumner County and want a no-pressure walk-through of how these loan types line up with your plans, call or text us at 615-265-1000 and we'll help you get oriented before you ever talk financing.