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Conventional mortgage vs. FHA

Benefits and drawbacks of both loan types

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Qualifying for a mortgage is often an essential step in the homebuying process. There are many different home loan types available, but you can decide the right one for you by taking the time to research your mortgage options.

Many mortgages are conventional loans, but there are government-backed options, like Federal Housing Administration (FHA) mortgages, VA loans and USDA loans. The loans you qualify for depend on your financial profile and your location, as well as the property type.

While both FHA and conventional loans let you finance your home purchase, they’re different in several key ways. Here’s a breakdown to help you make an informed decision.

What’s the difference between FHA and conventional loans?

These two popular financing options have some notable differences. For instance, FHA loans often have less rigid credit score requirements. Conventional loans, however, let you skip mortgage insurance if you pay a higher down payment.

Credit score

As mentioned above, the credit score requirements for FHA loans are generally less stringent than those for conventional loans. An FHA home loan requires a credit score of at least 580 for a 3.5% down payment. If you have a credit score between 500 and 579, you need to put down at least 10%, according to FHA loan guidelines. However, keep in mind that your lender may still require a higher credit score (at least 620) to qualify for the loan.

Conventional loans generally require a credit score of 620 or more. Even then, your lender may prefer a higher credit score, especially for low-interest financing.

Down payment amount

If your credit score is 580 or higher, you’ll need to put down at least 3.5% for an FHA loan.

If your credit score is 580 or higher, you need to put down at least 3.5% for an FHA loan. With a credit score in the range of 500 to 579, you need to put down 10% or more.

With a conventional loan, you can sometimes put down as little as 3%, but a higher down payment lets you reduce your monthly payments. A 20% down payment usually lets you forgo private mortgage insurance (PMI).

Debt-to-income ratio

Your debt-to-income ratio (DTI) helps lenders see the amount of your total monthly income you need to spend on your debts, such as student or car loans.

The formula for calculating DTI is total monthly debt payments divided by total monthly income times 100.

FHA loans require a 43% (or lower) DTI. Conventional loans often have a maximum DTI limit of 45%, but this doesn’t apply in all situations. Strong borrowers with high credit scores can be approved with a higher DTI than riskier borrowers.

Mortgage insurance

FHA loans require annual upfront mortgage insurance premiums (MIP) ranging from 0.45% to 1.05%, and the monthly installments can be moderate.

With a conventional mortgage, if your down payment is lower than 20%, the lender can require PMI. Factors like the size of your home and credit score can influence your total PMI amount.

Strong borrowers with high credit scores can get away with a higher DTI than riskier borrowers.”

Loan limits

Both FHA loans and conventional loans have varying loan limits, depending on your home’s location. The loan limit for FHA loans is significantly lower in most regions, but the amount you’re allowed to borrow also depends on your income and other personal factors. The loan limits for an FHA loan on a single-family home as of publishing are:

  • $356,362 for low-cost areas
  • $822,375 for high-cost areas

Some areas have an exception for single-family homebuyers that lets you borrow up to $1,233,550. Remember, though, that these limits change every year.

At the time of publishing, conventional loans often stick to the following conforming loan limits:

  • $548,250 for most areas
  • $822,375 for high-cost areas, like Guam, Hawaii and Alaska

As with FHA limits, limits for conventional loans change annually. If you need a higher loan than your conforming limit, you can apply for a jumbo loan. This financing option lets you exceed the conforming limits of traditional loans with a higher down payment. Jumbo loans can provide great rates for large loans, and lenders offer adjustable- and fixed-rate options.

Primary residence requirement

FHA loans are limited to primary residences and come with some clear standards for the condition of the property. For instance, your property must have:

  • A heating system
  • Electricity
  • A watertight roof

Conventional loans are better for second homes or investment properties. The property you purchase with a conventional loan must be secure and safe.

Conventional loanFHA loan
Credit score620+500+ with 10% down payment; 580+ with 3.5% down
DTI ratio45%43%
InsurancePMI required with less than 20% downMIP
2021 loan limit$548,250 for most areas$356,362 for most areas
Primary residence requirementNoYes

FHA loan benefits and drawbacks

FHA loans have more requirements than a mortgage, but they also come with some strong advantages for those who might have difficulty making a large down payment or who have a less-than-ideal credit score.

Pros

  • Lower average down payment requirement
  • Lower credit score requirement
  • Good for low-income borrowers
  • Ideal for first-time buyers

Cons

  • Can’t be used for investment properties
  • Requires mortgage insurance for a longer period
  • Stringent property standards
  • Requires MIP payments

Conventional loan benefits and drawbacks

Conventional mortgages may require larger down payments than FHA loans, but they also have fewer requirements and may give borrowers more options or flexibility.

Pros

  • Not limited to primary residence
  • Smaller down payment minimum
  • Liberal standards for property
  • Can finance vacation home and primary residences

Cons

  • Stricter requirements for lending
  • PMI requirement for lower down payments

When does it make sense to get a conventional mortgage?

A conventional loan is often cheaper than an FHA loan in the long run, especially if you have a lower DTI and a higher credit score. You can apply for a conventional loan at credit unions, banks or mortgage brokers.

You can also opt for the following types of conventional loans:

  • Portfolio loans
  • Subprime conventional loans
  • Adjustable conventional loans

Conventional loans don’t offer much leeway when it comes to poor credit scores or loan-to-value ratios, however.

Qualifications for an FHA Loan

FHA requirements are more lenient than those for a conventional loan. You can qualify for an FHA loan if you:

  • Have a credit score of at least 500
  • Make a 3.5% to 10% down payment
  • Have a debt-to-income ratio below 43%
  • Have a good employment history
  • Have proof of income

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    Bottom line: Should you get a conventional or an FHA mortgage?

    Overall, a conventional loan is generally a better option if your credit scores are excellent and you can make a 20% down payment. Applying for a conventional loan often lets you qualify for the best interest rates and can exempt you from paying private mortgage insurance.

    But conventional loans aren’t accessible to everyone. An FHA loan makes more sense if your credit scores aren’t great. You can qualify with a score as low as 500 and a 10% down payment, and if your score is 580 or higher, you can qualify with a 3.5% down payment. Just make sure you familiarize yourself with MIP requirements before opting for this loan type.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
    1. Federal Housing Administration, “FHA Loan Requirements.” Accessed Dec. 6, 2021.
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