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Conventional mortgage vs. FHA

Which loan type is right for you?

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Buying a home is one of the biggest financial decisions you will ever make, so it is essential to choose the right mortgage. Two common mortgage loan types are conventional mortgages and government-backed loans known as Federal Housing Administration (FHA) mortgages. Both are great choices for the right homebuyer, but you need to know which one will better serve your needs.

Key insights

  • Conventional loans have a slightly lower down payment minimum of 3% versus FHA’s 3.50%.
  • Strong borrowers with high credit scores can get away with a higher debt-to-income ratio than riskier borrowers.
  • FHA loans are for primary residences, not second homes or rental properties.

FHA vs. conventional loan financial requirements

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

Credit score requirement 620+ 500-580
Down payment Ranges from 3% to 20% Minimum of 3.5%
DTI ratio maximum 45% 43%
Mortgage insurance Insurance required with less than 20% down Mandatory insurance
Primary residence? No Yes
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.

» MORE: What credit score is needed to buy a house?

FHA loans typically require a minimum down payment of 3.5%, assuming your credit score is at least 580. If your score is below that, 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 means you can avoid private mortgage insurance (PMI).

Your debt-to-income (DTI) ratio helps lenders see how much of your total monthly income needs to go to your debts, such as student or car loans.

The formula for calculating DTI is:

Total monthly debt payments ÷ total monthly income x 100

For example, if each month you pay $1,000 in student loans, $300 on your car loan, and $500 to credit card debt, and you make $4,000 per month, your DTI is:

$1,800 ÷ $4,000 x 100 = 45%

FHA loans require a 43% to 45% (or lower) DTI, depending on the buyer’s circumstances.

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

“One of the drawbacks of an FHA loan is it does require an upfront mortgage insurance premium known as UFMIP,” said Ron Resha, a Massachusetts-based real estate agent. “However, this upfront-required mortgage insurance can be financed into your loan.”

Along with a one-time insurance payment when you purchase the home, you will also have an ongoing mortgage insurance premium (MIP).

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

» MORE: How to get rid of PMI

What’s the difference between FHA and conventional loans?

Along with different financial requirements, FHA loans and conventional loans have different loan limits and property requirements, which can affect how much house you can afford.

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 below are for single-family units and are accurate as of the time of publishing:

Conventional (conforming)FHA
Low-cost areas $726,200 $472,030
High-cost areas $1,089,300 $1,089,300

Both FHA and conventional loan limits change annually. If you need a higher loan than the conforming limit, you can apply for a jumbo loan. This financing option lets you exceed the conforming limits of traditional loans, but it requires 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. A few standards include:

  • Undamaged interior and exterior
  • Safe and reasonable property access
  • A working, permanent heating system
  • All relevant utilities
  • No loose wires or electrical systems
  • No wood-destroying insect infestation

Conventional loans require residences to meet certain safety standards as well, but they vary by lender and can be more flexible.

Is an FHA or conventional loan better?

Both loan types have their own benefits and drawbacks. Depending on your homebuying goals and finances, you might not be able to choose one loan over the other.

For example, if you are buying a second home, rental or vacation home, you will not qualify for an FHA loan. If you have an excellent credit score, a conventional loan might cost you less in the long run with lower interest rates.

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    Can you get an FHA loan on manufactured housing or a mobile home?

    FHA offers financing options for both mobile homes and factory-built housing. There are two types of FHA loans available: one for individuals who own the land on which the mobile home is located, and another for those whose mobile homes will be situated in mobile home parks.

    Can I refinance from an FHA loan to a conventional loan?

    Yes, it is possible to refinance from an FHA loan to a conventional loan. This may be a good option if you have improved your credit score and can now qualify for a conventional loan with a lower interest rate or better terms.

    How long does it take to close on an FHA or conventional loan?

    The closing process for both FHA and conventional loans typically takes between 49 and 54 days, although it can vary depending on the complexity of the loan and other factors.

    Bottom line

    Understanding the differences between conventional mortgages and FHA loans can help you choose which is right for your finances and homebuying situation.

    FHA loans can be a good option for borrowers with lower credit scores or limited down payment funds, while conventional loans may offer more competitive interest rates and the ability to avoid mortgage insurance if you can make a larger down payment.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. U. S. Department of Housing and Urban Development, "Let FHA Loans Help You." Accessed March 10, 2023.
    2. U. S. Department of Housing and Urban Development, “Section F. Borrower Qualifying Ratios.” Accessed March 10, 2023.
    3. U. S. Department of Housing and Urban Development, “MAXIMUM MORTGAGE LIMITS 2023.” Accessed March 10, 2023.
    4. Federal Housing Finance Agency, “FHFA Announces Conforming Loan Limit Values for 2023.” Accessed March 10, 2023.
    5. ICE Mortgage Technology, “March 2021 Origination Insight Report.” Accessed March 10, 2023.
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