FHA vs. Conventional Loans

As the two most common loan programs, these options are often confused. Learn the difference to decide which loan product is best for your goals.

If you’re interested in buying a house, FHA and conventional home loans are both excellent products, whether you’re a first-time buyer or a repeat buyer. But since these are two different programs, they have two different sets of requirements. Understanding how these mortgages differ can help you decide which one is right for you.


What is an FHA Loan?

An FHA home loan is a government-sponsored mortgage program insured by the Federal Housing Administration. The FHA doesn’t issue loan funds. Instead, borrowers interested in FHA mortgages must apply for a home loan through an FHA-approved mortgage lender.


What is a Conventional Loan?

A conventional mortgage loan is a home financing program backed by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy mortgages from banks and other lenders. Conventional home loans are a popular loan program for purchases and refinances. These loans include fixed-rate and adjustable-rate mortgages, as well as mortgages with flexible terms (15 years, 20 years, 30 years, etc).

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FHA Loan Advantages

FHA home loans are appealing to many first-time homebuyers because they have low credit score requirements and lower down payments. Borrowers who’ve had credit problems in the past (such as a foreclosure or bankruptcy) may find that it’s easier to get an FHA loan with a low FICO score compared to a conventional loan.

Conventional Loan Advantages

Although conventional loans can be harder to get due to higher credit score and down payment requirements, they offer more flexible repayment terms compared to FHA loans. And unlike FHA loans (which are only for primary residences), conventional loans can be used to purchase different types of real estate.

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Credit Scores and Mortgage Rates

The minimum credit score for a conventional loan is 620. With an FHA loan, however, you can get approved with a credit score as low as 500 to 580. Improving your credit can make it easier to get approved. Pay your bills on time and pay down credit cards and other debts to add points to your FICO score.

Your mortgage rate for either loan depends on several factors, such as your credit score and the amount of your down payment. For the most part, FHA loan rates are comparable with those of a conventional loan.

Debt-to-Income Ratio

Debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward debt repayment. Mortgage lenders use DTI ratios to determine a borrower’s risk level. Typically, conventional home loans allow DTI ratios up to 36%, whereas FHA home loans allows DTI ratios up to 43%. Borrowers with compensating factors, though, may get approved with a DTI ratio up to 50%. Compensating factors include a high credit score and a large cash reserve after paying mortgage-related expenses.

Mortgage Insurance

Borrowers who purchase a home with less than a 20% down payment will have to pay private mortgage insurance (PMI) with a conventional loan. Mortgage insurance is also required on FHA home loans with less than 20% down. FHA loans also have a one-time upfront mortgage insurance premium paid at closing.

With a conventional loan, mortgage lenders remove PMI once the property has at least 20% equity. With an FHA loan, mortgage insurance is for the life of the loan when a borrower puts down less than 10%. Removing mortgage insurance once you have 20% equity will require refinancing the loan.

Property Standards

Only certain properties qualify for an FHA home loan. FHA home loans can only be used for the purchase of a primary residence. This includes single-family homes, townhouses, manufactured homes, and condos in approved complexes. A conventional home loan can we used for a primary residence, vacation properties and investment properties

Loan Limits

Both FHA and conventional home loans have loan limits that vary by county or state. For 2019, the FHA loan limit for a single-family residence is $314,827, and $726,525 in high-cost areas. The loan limit for a conventional home loan is $484,350, and $726,525 in high-cost areas.

Down Payments Requirements

Conventional loans and FHA loans also have different down payment requirements. FHA home loans require a minimum down payment of 3.5%. The traditional down payment for a conventional loan is 20%, but it is possible to get a mortgage with much less. You can get a conventional loan with a down payment as low as 3% to 5%.

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