Unless you’re already a mortgage expert, picking between an FHA loan and a conventional loan can be tricky. Luckily, we’re about to lay it all out for you.
If you just want to sit back and relax, our mortgage blogger, Carter, can walk you through the basics in this short video. For a deep dive into FHA vs conventional loans, read on.
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Know what you want? Jump ahead.
- Credit Score
- Down Payment
- Private Mortgage Insurance
- Income Requirements
- Interest Rate
- Property Qualifiers
- Refinancing
- FHA vs Conventional Comparison Chart
- How to Choose
What are FHA and Conventional Mortgage Loans?
First, let’s take a quick overview of the whole FHA vs. conventional loan debate.
FHA stands for Federal Housing Administration, which means that FHA loans are backed by the government. Originally, they were created to help make homeownership more accessible to buyers with damaged credit or minimal savings. After the housing market crashed, they became popular across all income levels and especially with first time buyers.
Conventional loans, meanwhile, are your plain vanilla loans. They aren’t backed by the government, but they must conform to specific guidelines in order to be sold to Fannie Mae and Freddie Mac and then resold to investors—as most mortgages are, one way or another. They, too, are widely popular.
Both loans offer you flexibility in type (fixed rate vs adjustable rate) as well as term length (30 years is typical, though 15 is another popular choice). There are a couple exceptions, but we’ll tackle those later.
There are x key points of difference, which we’ll tackle next.
Credit Score Requirements for FHA Versus Conventional Loans
Let’s start with the biggest difference between FHA loans and conventional loans.
The credit score.
A credit score of 580 or over allows you to put make a down payment of just 3.5%. Between 479-500, and you’ll need to put down at least 10%. If you’re leaning toward an FHA home loan, this is the lowest number you should shoot for.
620 is generally the lower limit of conventional credit requirements. Remember, though, that credit impacts interest rate. While you may be able to go as low as 620 if the rest of your application is spotless, you’ll want to be higher to get the best possible rate.
Winner: both. Which is the true winner for you will depend on your credit score. Pay special attention to this
Down Payment Requirements for FHA and Conventional 97
When most people hear “large loan,” they think “large down payment. That isn’t necessarily the case with a mortgage, though.
“The majority of clients and Realtors I speak with assume you need 10-20% down to buy a home,” said Terry Hastings, Manager of Total Mortgage’s Ridgefield branch. “Many are opting to rent because they don’t know that they could buy—and probably pay less than renting.”
In reality, you don’t even have to put down 10%. Or 5%.
With an FHA loan, you can put as little as 3.5% down on a house. You just need to have a credit score of at least 580 and meet all other FHA requirements (which we’ll get into later).
With a conventional loan, you can go as low as 3%—something that’s actually called a conventional 97 loan. Since a conventional 97 loan is technically a different program than a standard conventional loan, it has a few extra restrictions:
Conventional 97 Loan
- The loan must be a 30-year fixed-rate loan
- The property must be a one-unit, single family home, co-op, PUD, or condo.
- The property will be the buyer’s primary residence
- The buyer (or one of the buyers) can’t have owned a house in the last 3 years
- The loan amount is at or under $424,100
Of course, many first-time homebuyers meet these restrictions anyway, so not all will find them an obstacle.
Winner: Conventional. If you want to go low, it doesn’t get any better than 3%.
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Do FHA and Conventional Loans have PMI?
Of course, if you put less than 20% down using any loan except for a VA loan, that means you’ll have to get private mortgage insurance. Private mortgage insurance (or PMI) protects lenders in the event that borrowers with low equity default on their loans—and the borrower has to pick up the tab.
When it comes to conventional loans, PMI is simple: make it to 20% equity, and you’re free and clear. That can either mean that you put 20% down on the house initially, or that you pay PMI until you hit 20% with your monthly mortgage payments. Your lender should drop your PMI automatically at 20%.
For FHA loans, though, the story is different. You’ll have to pay PMI for the life of the loan if you initially make a down payment of less than 10%. To get out of paying PMI, you’ll have to refinance once you build enough equity.
One more downside? PMI tends to be higher for FHA loans than it is for conventional loans. The difference isn’t dramatic, but it’s something to keep in mind.
Winner: Conventional. Being able to get rid of PMI ASAP is a huge plus.
Income Requirements for FHA and Conventional Mortgages
Debt to income (or DTI) ratio is another factor you’re going to need to consider when choosing between a conventional and FHA loan.
DTI exactly what it sounds like—the percentage of your monthly income that is already going toward paying off debt.
While the exact requirement can (again) vary from lender to lender, most will require a 45% or lower DTI ratio for conventional loans.
With FHA loans, however, lenders will often offer a bit more flexibility if the borrower is in otherwise good shape. In some cases, you might see DTI ratios as high as 55% accepted.
“I just did a loan this summer for a buyer who had a student loan,” Hastings said. ”Even though the parent paid for the loan, the buyer’s ratios were too high for Fannie or Freddie. FHA approved the loan and without it, she would not have been able to buy a home. As it stands, her monthly payment is less than it would cost to rent.”
Winner: FHA. If you have a lot of debt, an FHA might just be your ticket to a mortgage.
FHA vs Conventional: Battle of the Interest Rate
However, if this is the only factor that’s tipping you over the edge to an FHA , you might want to think again. The difference between the two has historically been fairly minor, and since rates vary from lender to lender anyway, the savings that come with an FHA could easily be offset by having to pay PMI for the life of the loan.
If you’re concerned with getting the lowest interest rate possible, there are other ways to get a lower rate, like opting for an adjustable rate mortgage (ARM), or paying points ahead of time.
Winner: FHA. But only by a hair.
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Property Eligibility for FHA and Conventional Loans
Just because you qualify for a mortgage doesn’t necessarily mean your future house will.
Because FHA loans are backed by the government and meant to help families, there are more restrictions on what sort of houses qualify.
FHA property guidelines
- Must be occupied by the buyer
- Must be your primary residence (i.e. not a vacation or investment property)
- Must be occupied within 60 days of closing
- Must be assessed for safety with an additional home inspection
- Must be under the capped lending amount (this varies depending on location and property size)
Conventional loan property qualifiers
Conventional loans have fewer restrictions. Second homes and investment properties both qualify, and you’ll need only the standard inspections. They, too, have a capped loan amount, though. The limit is $424,100 in most areas, though that number increases in high-cost areas and for multi-unit properties. If you need more than that, a jumbo loan is your next step.
Of course, it’s a different story if you’re planning on taking advantage of a conventional 97 loan to put just 3% down. In that case, the property must be single-family, be your primary residence, and require a loan amount under $424,100 (as outlined in our section on down payments).
Winner: Conventional. When it comes to flexibility, conventional takes it, easily.
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Refinancing: Conventional Loans Versus FHA Loans
Here’s one thing you might not have considered yet: what happens if you want to refinance 5 or 10 years down the line?
With both loans, you’ll be able to refinance into virtually any loan you want, changing term length,
For a conventional loan, this will require more or less the same process that got you the loan in the first place, though it should be much less stressful now that you’re not also trying to juggle a move.
However, if you’re refinancing from an FHA loan to another FHA loan, you do so using a special program, called FHA streamline. It generally allows you to refinance with no new credit score, no new appraisal, and no new income verification, cutting way down on the time and hassle involved in refinancing.
Winner: FHA. Simple and fast is always a plus.
FHA vs Conventional Comparison Chart
Which Mortgage Loan Should You Choose?
When we get down to it, neither loan is objectively better than the other. It all ultimately depends on you, your financial situation, and your plans for the future.
Choose an FHA loan if:
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Choose a conventional loan if:
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