Comparing FHA and Conventional Home Loans
When it comes to mortgages, you have a lot of options. Two of the most common are FHA and conventional loans.
| Feature | FHA | Conventional |
|---|---|---|
| Minimum Credit Score | 580 (with 3.5% down), 500 (with 10% down) | 620 or higher |
| Down Payment | As low as 3.5% | As low as 3% (for qualified buyers)5% for most buyers |
| Debt-to-Income Ratio (DTI) | Up to 50% (with strong compensating factors) | Typically limited to 43% (may go higher with strong credit) |
| Mortgage Insurance | Required for life of the loan (unless 10% down, then 11 years) | Required if down payment is <20%, but can be removed once 20% equity is reached |
| Loan Limits | Set by county, usually lower than conventional limits | Higher limits, especially for jumbo loans |
| Property Requirements | Must meet strict HUD standards | Less strict appraisal and property |
| Ideal For | First-time buyers, Lower credit scores | Buyers with stronger credit and stable income, At least 20% down payment |
| Interest Rates | Often lower than conventional loans (due to government backing) | May be slightly higher, but no upfront mortgage insurance |
| Upfront Costs | Upfront Mortgage Insurance Premium (UFMIP) of 1.75% | No upfront mortgage insurance |
| Assumable Loan | Yes | Rarely |
Though both can be great products to help you buy a home, each has its own unique pros and cons, and one may be better tailored to your income level, credit score, and homebuying goals -- so know the difference and which option may better fit you.
Let's take a closer look.
FHA loans and conventional loans have vastly different credit score thresholds. Additionally, with an FHA loan, your credit score also affects the minimum down payment requirement.
With the FHA loan, homebuyers with credit scores of 580 or higher may qualify for the lower 3.5% down payment option. Those with credit scores between 500 and 579 may still qualify, but they need a down payment of at least 10%.
Conventional credit requirements can vary by lender, but typically, conventional loans require a credit score of around 620 regardless of down payment. This higher threshold often excludes those with less-than-perfect credit and many first-time homebuyers.
As mentioned above, FHA loans allow as little as 3.5% down, or about $7,000 on a $200,000 home.
Down payment requirements for conventional loans can vary by lender and other factors, but a 5% minimum is common (3% is possible with some lenders). That means a $10,000 down payment on a $200,000 property.
If coming up with your down payment is difficult, both loan types allow you to use gift money toward your down payment. However, with an FHA loan, your entire down payment can be from gift funds, while those using a conventional loan may need to put down a portion of their own funds before including gift money. Talk with a lender for more details.
Conventional loans typically require private mortgage insurance (PMI) unless borrowers can make a down payment of 20% or more. The costs for PMI can vary based on your credit score and other factors, but they can easily add $100 or more to your monthly payment. This expense typically ends once your loan-to-value ratio reaches 80%.
Conversely, FHA loans require mortgage insurance no matter what, even if you put 20% down. FHA loans come with both a one-time upfront fee and an annual mortgage insurance premium (MIP), which you pay monthly as part of your mortgage payment.
The upfront MIP, also known as the FHA funding fee, is 1.75% of the loan amount. This fee is due at closing but is typically financed into the entire loan amount to reduce out of pocket costs.
The annual MIP ranges from 0.15% to 0.75% depending on loan term, loan amount, and down payment. However, for most FHA borrowers, the annual MIP is 0.55% of the loan amount.
The annual MIP can last for the life of the loan or be removed after 11 years if the original down payment is 10% or more.
Both FHA loans and conventional loans offer refinance options. On conventional loans, you undergo a credit check, and the lender sends out an appraiser to assess the value of your home.
Though FHA loans can also be refinanced in a similar fashion, some borrowers may be able to qualify for the agency’s streamline refinance program, which requires no appraisal, no credit check, and no income verification. Both options can help lower your rate or shorten or extend your term. Other borrowers choose to refinance from an FHA into a conventional loan.
FHA loans have lower maximum limits than conventional mortgages. In more expensive areas of the country, FHA loan limits tend to be higher.
Find the FHA loan limit in your area here.
Conventional loans don’t have strict loan limits, but borrowers seeking larger loans usually face stricter lending rules. Generally, loans exceeding the conforming loan limit are referred to as jumbo loans, although this limit can vary by location.
When using an FHA loan, the appraisal tends to be more thorough than a conventional loan. Not only does the appraisal focus on the home’s value, but it also assesses the structural safety of the property and ensures that everything complies with local building codes.
Appraisals on conventional loans focus more on the value of the home itself. The lender wants to know that if you’re unable to make payments on your mortgage, they can recoup their investment in case of foreclosure.
With conventional loans, the appraisal places less emphasis on the home’s safety since that’s the purpose of a home inspection. However, there are typically no quality standards when applying for a conventional loan.
Your debt-to-income ratio (DTI) is the amount of pre-tax income you spend each month on debt payments, such as credit card payments, auto loans, mortgages, personal loans, and more.
When using an FHA loan, lenders are more flexible with DTI requirements since the federal government backs their loans. Most lenders want to see your DTI no greater than 50%. However, some lenders approve loans when an applicant has a DTI higher than 50% if compensating factors exist, such as a high credit score or a large cash reserve.
Conventional mortgage lenders prefer a lower DTI because it indicates a lower risk of default. Most conventional loans require a DTI no greater than 36%.
Several different factors determine interest rates on conventional loans. The current mortgage rate market helps determine the baseline for many lenders. Beyond that, a borrower’s credit score, DTI, and loan-to-value ratio (LTV) influence rates are.
Meanwhile, FHA loans generally have slightly lower interest rates because lenders have less risk, given the government's involvement.
If you plan to purchase a vacation home, you will not be allowed to use an FHA loan. Instead, you can use a conventional loan, but you’ll face stricter lending requirements. Most lenders require a down payment of 10% to 20% on vacation homes. Additionally, they require strong credit scores and several months' worth of cash reserves.
FHA loans often come with higher short-term costs, including a slightly larger down payment and an upfront mortgage insurance premium. In contrast, conventional loans may also be less expensive in the long term if you can put down at least 20%, which allows you to avoid annual mortgage insurance.
In addition to the cost differences, FHA and conventional loans can also vary in how long it takes to close. Since FHA loans have strict property standards, the process involves making sure the property is safe and complies with local building codes. If repairs or updates are needed, it will take time. All of this can make FHA loans take longer to close compared to conventional loans. Since borrowers don’t need to meet the strict property requirements that apply to an FHA loan, you can usually close a conventional loan in fewer days.
What is the difference between a conventional loan and an FHA loan? As you’ve seen, these two mortgage options differ in many areas.
In short, if you have excellent credit and savings for at least a 5% down payment, a conventional loan might be right for you; however, those with less-than-perfect credit and first-time homebuyers may find that an FHA loan is a better choice.
To understand how costs can vary between the two, see the chart below, which uses a $200,000 home purchase with a 30-year term as an example. We’ll assume the conventional loan requires a 5% down payment and has reasonable private mortgage insurance costs. In our example, the FHA's upfront MIP isn't shown in the table but is financed in the total loan amount and included in the calculation.
| LOAN TYPE | DOWN PAYMENT | PRINCIPAL AND INTEREST PAYMENT | MONTHLY MORTGAGE INSURANCE | MONTHLY PRINCIPAL & INTEREST PAYMENT |
|---|---|---|---|---|
| FHA | $7,000 | $1,054.19 | $92 (Annual MIP) | $1,189.98 (upfront MIP included in calculation) |
| CONVENTIONAL | $10,000 | $1,019.96 | $81 (PMI) | $1,100.96 |
FHA loans are a great option for first-time homebuyers. They can also be helpful to anyone who has a lower credit score, doesn’t have the money for a large down payment, or has a higher DTI.
Conventional loans are ideal for individuals with a down payment of at least 20%, as they allow them to avoid mortgage insurance. They can also be good for someone with a credit score above 640. Conventional loans also benefit those wanting more flexible repayment terms.
