FHA vs. Conventional Home Loans

Which is better—FHA or conventional loans? We’re here to settle the debate. But first, let’s take a look at the difference between an FHA vs. conventional loan.

FHA vs Conventional Home Loans: What’s the difference?

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration.   A conventional loan is any mortgage not backed by any branch of the federal government, including the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture.

A Deep Dive: Comparing FHA and Conventional Loans

Now you know the key differentiator between FHA and conventional loans, but let’s dive deeper into the nuances.

Down Payments

FHA

To qualify for an FHA loan, applicants must produce a minimum 3.5 percent down payment and have a credit score of 580 or higher.

Conventional

Traditionally, conventional mortgage holders require applicants to produce a 10-20 percent down payment. While some conventional mortgages allow a 3 percent down payment, that option is reserved for those with robust savings and credit scores in the high 600s.

Credit Requirements

FHA

To qualify for an FHA loan, applicants must have a credit score no lower than 580. However, there is still some wiggle room for those with credit scores in the 500-579 range. If you fall into the latter category, you may still qualify by making a 10 percent down payment.

Conventional

Conventional loans generally require applicants to make a 10-20 percent down payment and have a credit score of 620 or higher. That said, lenders determine credit score requirements, so they are not set in stone.

Debt-to-Income Ratio

Debt-to-income (DTI) is the percentage of earned monthly income (untaxed) you use to pay debts, including mortgages, credit cards, child support, car loans, and student loans. The higher your DTI, the more of a liability you become in the eyes of lenders.

FHA

Government-backed institutions require that your DTI is no more than 50 percent.

Conventional

Likewise, conventional lenders require a DTI of no more than 50 percent. However, all private lenders differ, so some may allow a DTI higher than 50 percent. As a result, you are more likely to qualify with a DTI of 43 percent or less.

Mortgage Insurance

Mortgage insurance protects lenders if you default on your loan.

FHA

FHA loans require you to have mortgage insurance. Unlike conventional loans, however, FHA mortgage premiums stay the same, regardless of your credit score or down payment. What’s more, FHA mortgage insurance premiums last for the life of the loan if you only put 10 percent or less down. However, if you put 10 percent or more down, you’ll only pay FHA mortgage insurance for 11 years.

Conventional

Conventional loans require you to carry mortgage insurance if your down payment is less than 20 percent. Your premium may change depending on your credit score and down payment amount.

Which One is Right For You?

It depends on your circumstances.  Conventional loans offer purchasing flexibility, fewer fees, lower interest rates and you won’t be required to pay Private Mortgage Insurance (PMI) with a 20% or more down payment.  However, if your credit score is lower than average and you have limited funds for a down payment, then an FHA loan may be your best option.

Find a Mortgage that Fits You

Whether you’re looking for a conventional loan or an FHA loan, we can help! Learn more about your mortgage options by meeting with a trusted mortgage lender. Make an appointment today to speak to one of our team members.