The two most popular types of mortgage loans used today are Conventional and FHA loans.
Choosing the right mortgage program is critical to make sure you get the best deal on your loan.
In this article, we compare FHA and Conventional loans so you can discover which one is best for your situation.
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FHA vs. Conventional Loan Comparison
Conventional Loans vs. FHA loans
500 with 10% down
10% down with 500 score
Up-front MIP payment Monthly MIP payments
Monthly PMI payments
Low-cost area - $331,760
Low-cost area - $510,400
43% - 50% max DTI depending on the lender
Max 43% DTI
Primary residence only
Pros and Cons of Conventional Loans
- Higher loan amounts (up to $510,400)
- No up-front private mortgage insurance (PMI).
- Flexible guidelines on the condition of the home
- PMI payments cancel when the LTV reaches 78%
- NO PMI with 80% loan-to-value ratio
- Mortgage insurance is less expensive (0.51% vs 0.85% with FHA)
- 3% downpayment for conventional 97% LTV loans
- Requires a higher credit score
- Large downpayment 5%-20%
- More difficult to qualify for than FHA
Pros and Cons of FHA Mortgages
- Low downpayment requirement of 3.5%
- Easier to get approved for than conventional loans.
- Lower credit scores accepted
- Low mortgage interest rates
- Lower maximum loan limits
- Mortgage insurance required even if putting 20% down
- Mortgage insurance monthly cost is higher
Minimum Credit Score Requirements
Your credit score is the most significant factor in getting a mortgage and getting the best rates. It is best to have a 620 credit score for either a conventional or FHA loan.
If you have poor credit and your score is below 620, then an FHA may be a better option.
FHA requires a 500-579 credit score with 10% down. And a 580 or higher score with just a 3.5% down payment.
Because of the flexible credit guidelines, FHA loans are the better option for people with poor credit.
Credit Score Requirements
- FHA Loan: 500-579 credit score (10% down payment)
- FHA Loan: 580+ credit score (3.5% down payment)
- Conventional Loan: 620+ credit score (5% – 20% down payment)
- Conventional 97: 640+ credit score (3% down payment)
FHA home loans have a major advantage for people who don’t have the money to make a sizeable down payment.
A 3.5% downpayment is needed if you have a minimum credit score of 580. If you have a credit score of less than 580, you may qualify by paying a more substantial downpayment of 10 percent.
A conventional mortgage will have a down payment of 5% – 20% depending on the lender, loan type, and FICO score of the borrower.
However, there is a conventional 97 loan program that requires just a 3% down payment. This is even lower than FHA loans require.
Closing costs are fees charged by lenders for processing and funding for issuing a loan. They include items like origination fees, home appraisal fees, escrow, and title insurance.
Typically, average closing costs are 3%-6% of the loan amount for conventional and FHA loans. However, since borrowers seeking FHA loans have lower credit scores on average, they can expect their closing costs to be higher than someone with good credit because of the increased risk.
Lenders fees will vary depending on the lender, which is why you should get loan estimates from at least three different mortgage lenders to make sure you get a good deal.
Seller Paid Closing Costs
The seller can pay your closing costs as long as you have negotiated it into the purchase agreement. Unless you have more than enough money to cover your down payment and closing costs with room to spare you can ask the seller to contribute.
The maximum amount of closing costs the seller can contribute
- Conventional loan – 3%
- FHA loans- 6%
While conventional mortgages are the most popular type of home loan used today, about 70% of all home loans are conventional.
FHA loans are the most popular type of mortgage used by first-time homebuyers. Mainly because of the low credit and down payment requirements.
Also, FHA allows you to use gift funds for 100% of the down payment, while most conventional loans do not.
There are also down payment assistance programs and first-time buyer grants you can use for FHA.
Conventional mortgages typically do not allow down payment funds to come from anyone else but the borrower.
FHA – FHA loans require mortgage insurance premium (MIP). With a Government loan, it is referred to as a mortgage insurance premium or MIP. FHA MIP fee varies, but it is typically 0.85% of the loan amount. See FHA MIP Chart
Conventional – A conventional mortgage loan will also have mortgage insurance, called private mortgage insurance, or PMI. It’s only required when the borrower has less than a 20% down payment. PMI on conventional mortgages is usually 0.50% of the loan amount.
How Much Can You Borrow
Conventional Loan Limits
The Conventional home loan limit is $510,400 in most areas of the U.S. The limit increases to $765,600 in certain high-cost areas.
|Units||Low-Cost area loan limit||High-Cost area loan limit|
FHA Loan Limits
FHA Loan limits are much lower with the limit in most of the U.S. is $331,760. The loan limits increase in high-cost areas of the country.
|Units||Low-Cost area loan limit||High-Cost area loan limit|
Your debt-to-income ratio is a major determining factor in how much you can borrow.
This calculation is the percentage of your monthly income minus monthly obligations.
The FHA is much more lenient on maximum debt-to-income ratios.
Maximum debt-to-income ratio :
- FHA – 50%
- Conventional – 43%
Both FHA and conventional mortgages have more options than just the standard 30-year fixed-rate mortgage. You can get a 15-year fixed-rate or adjustable-rate mortgage with either type of loan.
Conventional loans will have more options like a 10,15,20,30, and even 40 year fixed rate mortgage options. As well as adjustable rate terms like a 5-1 ARM.
Adjustable-rate mortgages have lower rates than fixed-rate loans and a lower monthly payment.
After the initial period of 5 years, the interest rate and monthly payment increase on an annual basis.
A Conventional Mortgage with 20% Down is Cheaper
The upfront costs associated with obtaining an FHA-insured mortgage is lower with a conventional loan because of the low down payment.
However, because PMI is lower on conventional loans, PMI cancels once the LTV reaches 78%, and there is no up-front mortgage insurance fee.
While FHA loans are cheaper in the beginning, over the life of the loan, conventional loans are the cheapest option.
- Single-family homes
- FHA approved Condos and townhomes
- Detached and semi-detached homes
- Manufactured homes
- Single-Family Home
- Condominiums and townhomes
- Homes in need of repairs
- Detached and semi-detached
View Fannie Mae property requirements
Both FHA and Conventional home loans allow you to refinance your mortgage to get a lower mortgage payment and better interest rate.
FHA – If you have an FHA loan, you may qualify for an FHA streamline refinance. A streamline refinance works the same as traditional refinancing but requires less paperwork. There is no credit check or income verification. Streamline refinances are done quickly and easily, helping borrowers get low rates and reduce their payments.
Conventional – If you have a conventional loan, there are traditional rate and term refinance options, but there are no streamline refinancing options.
This is where the interest rate will be lowered, and the term can be extended or shortened.
There is another option to refinance your conventional mortgage loan. The HARP program allows borrowers with a loan owned by Fannie Mae or Freddie Mac to refinance their loan regardless of the amount of equity they have.
Conventional Loans may be Cheaper
If you are someone who is planning on using a 20% down payment to avoid PMI, you have no choice but to get conventional financing because FHA loans will require mortgage insurance regardless of how much your down payment is.
If you have a 20% down and are seeking an 80% loan-to-value mortgage, then a conventional mortgage will be cheaper than FHA.
The Bottom Line
When comparing FHA and conventional mortgages, you need to keep in mind there is no right answer as to which is better, FHA, or conventional.
Both mortgages have their advantages and disadvantages.
An FHA home loan might be perfect for one homebuyer, but not the best option for another.
You need to speak to a mortgage expert to go over the pros and cons of each to see which loan is best for you.
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