Conventional Loans vs. FHA Loans – Key Differences


The two most popular types of mortgage loans used today are Conventional loans and FHA loans.

But what are the differences?

This article will compare the key differences, requirements, and pros and cons of FHA and Conventional loans to help you decide which one is right for your situation.

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FHA vs. Conventional Loan Comparison Chart

FHA Loans

Conventional Loans

Credit Score Requirement

500+

620+

Down Payment 

3.5%

5%-20%

Mortgage Insurance

Required on all FHA loans


Not required with 20% down

Upfront Insurance Premium


1.75%


Not required

Interest Rates

Lower rates

Higher rates

Loan Limits

$331,760-$765,600

$510,400-$765,600

Maximum Debt-to-Income


50%


43%

Borrower Requirements

Easier to qualify for


Harder to qualify for

Eligible Residences

Primary residence only

No restrictions

FHA vs. Conventional Loans – Loan Requirements

FHA

FHA loans are a government-backed mortgage that is guaranteed by the Federal Housing Administration and issued by FHA-approved lenders. The program is funded by a mortgage insurance premium (MIP) included in the monthly mortgage payment.

FHA Loan Requirements

  • 580 credit score with 3.5% down
  • 500-579 score with 10% down
  • Maximum 50% debt-to-income ratio
  • For primary residence only
  • 1.75% Upfront MIP fee
  • 24 month waiting period after a foreclosure or bankruptcy
  • 1% of student loan debt added to the debt-to-income ratio

More » FHA Loan Requirements

Conventional

Conventional loans are not issured by the government but by private mortgage insurance companies. They require a higher credit score and a larger down payment than FHA loans. also referred to as conforming loans because they meet the minimum loan standards of Fannie Mae and Freddie Mac, the two largest buyers of mortgage loans. A conventional mortgage is not insured by the government but by private mortgage insurance (PMI), which is included in your monthly payment.

Conventional Loan Requirements

  • Minimum 620 credit score
  • 3% – 20% down payment (No PMI with 20% down)
  • 36-48 month waiting period after bankruptcy or foreclosure
  • Maximum 43% debt-to-income ratio

More » Conventional Loan Requirements

Credit Requirements

  • FHA Loans – 580 credit score with 3.5% down / 500 credit score with 10% down
  • Conventional Loans – 620 credit score

 

The credit score requirement is a key difference between FHA and conventional loans. Borrowers with a credit score of 500 may qualify for an FHA mortgage with 10% down. Borrowers with a 580 score need just a 3.5% down payment.

Conventional loans require a minimum 620 FICO score to be eligible. Because of the flexible credit guidelines, FHA loans are a better option for people with poor credit.

More » FHA Credit Requirements

Down Payment

FHA

  • 500-579 credit score – 10% down payment
  • 580+ credit score – 3.5% down payment

 

The low 3.5% FHA down payment is a major advantage for people who don’t have the funds to put 20% down.

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 with at least 10% down.

Conventional

  • Conventional Loan with PMI – 5% down payment, 620 credit score
  • Conventional Loan no PMI – 20% down, 620+ credit scores
  • Home Possible Loan – 3% down payment, 620 credit score, for first-time homebuyers and has income limits.
  • Piggyback 80/10/10 loan – 80% LTV conventional loan, 10% second loan, 10% down, no PMI
  • HomeReady Loans – 3% down payment Fannie Mae loan program for first-time homebuyers with a 620 credit score
  • Conventional 97 – 3% down payment, 680 credit score, no income limits
  • Jumbo Loans – 15%+ down payment, 700+ credit score,

 

Traditionally, conventional loans require 20% down; however, that is no longer the case. The HomeReady and Home Possible loan programs are conventional loan options for first-time homebuyers that require just 3% down.

Mortgage Insurance

FHA

With an FHA loan, there are two types of mortgage insurance required. An upfront mortgage insurance premium (MIP) fee of 1.75% of the loan amount and annual MIP, typically 0.85% of the loan amount. See FHA MIP Chart

  • Down payment of 10% or more – Mortgage insurance is required for 11 years
  • Down payment of less than 10% – Mortgage insurance will be required for the life of the loan
  • 1.75% Upfront MIP fee to be paid at closing

 

Conventional

Conventional loans require private mortgage insurance (PMI) when less than a 20% down payment is used. There is no upfront PMI with conventional loans. It’s only required when the borrower has less than a 20% down payment. PMI on conventional mortgages is usually between .50% – 1.00% of the loan amount.

  • Down payment of 20%+ – No PMI is required
  • Down payment of less than 20% – PMI is required until the loan-to-value ratio reaches 78%
  • No upfront PMI required

 

Loan Limits

Loan limits are the maximum loan amount you can get. FHA loan limits are lower than conventional loan limits in most parts of the country.

Conventional

# of units

Low-cost area limit

High-cost area limit

1-Unit

$510,400

$765,600

2-Unit

$653,550

$980,325

3-Unit

$789,950

$1,184,925

4-Unit

$981,700

$1,472,550

FHA

Property Size

Low Cost Area "Floor"

High Cost Area "Ceiling"

Guam, Hawaii, Alaska, U.S. Virgin Islands

1 Unit

$331,760

$765,600

$1,148,400

2 units

$424,800

$980,325

$1,470,475

3 units

$513,450

$1,184,925

$1,777,375

4 units

$638,100

$1,472,550

$2,208,825 

See how much house you can afford using our calculator 

Debt-to-income Ratio

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.

  • FHA – 50% Maximum DTI ratio
  • Conventional – 43% maximum DTI ratio

 

Eligible Properties

FHA loans have strict property requirements. To qualify you must be buying the home as your primary residence. Distressed homes or homes that are in need of major repairs do not qualify. If you plan on buying a fixer-upper you will need to get an FHA 203k rehab loan.

FHA Loan Eligible Properties

  • Single-family homes
  • 2-4 unit multifamily properties
  • Manufactured and mobile homes
  • Condos and Townhomes
  • Only available for primary residences

 

You can get a conventional loan on just about any type of property. Real estate investors can buy a property to flip or use as rental income. If the home needs repairs or renovations you will still qualify.

Conventional Loan Eligible Properties

  • Single-family homes
  • Second homes and investment properties
  • Condos and townhomes
  • Rehab properties
  • Multi-unit properties
  • Planned unit developments (PUDs)

 

Closing Costs

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 2%-5% of the loan amount for both conventional and FHA loans.

Closing costs vary depending on the lender, which is why you should get loan estimates from at least 3-4 different lenders to make sure you’re getting competitive rates and the lowest closing costs.

How to negotiate lower closing costs on an FHA loan

Seller Paid Closing Costs

The seller can contribute to your closing costs if you have negotiated the amount of closing costs they agreed to pay in the purchase agreement.

Maximum seller-paid closing costs

  • Conventional loans – 3%
  • FHA loans- 6%

 

Loan Terms

30-year and 15-year fixed-rate mortgages and adjustable-rates mortgage terms are available for both FHA and conventional loans.

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.

Fixed-Rate Mortgages

Adjustable-Rate Mortgages

Lower risk

Higher risk

Higher interest rate

Lower interest rate

Rate does not change

Low initial rate that goes up or down based on the market

Monthly mortgage payments stay the same

Mortgage payments can increase or decrease

Longer Mortgage Term

Shorter Mortgage Term

Lower monthly payment

Higher monthly payment

Higher interest rate

Lower interest rate

Approved for higher loan amount

Approved for lower loan amount

Pay more interest over life of loan

Pay less interest over life of loan

Build equity slower

Build equity faster

Which is better? FHA or Conventional

A Conventional Mortgage with 20% Down is Cheaper than an FHA loan because they do not require mortgage insurance. If you don’t have 20% down, then an FHA loan will be slightly cheaper because they have lower interest rates

Mortgage insurance is lower on conventional loans, it cancels once the LTV reaches 78%, and there is no upfront mortgage insurance fees. A conventional loan could be cheaper over the life of the loan.

You should get a loan estimate from mortgage lenders to see if an FHA loan or conventional loan is . Use our loan comparison calculator to compare multiple loan offers to find out which one is the cheapest.

While FHA loans are cheaper initially, conventional loans are the cheapest option over the life of the loan.

FHA vs. Conventional Refinance Programs

Both FHA and Conventional home loans allow you to refinance your mortgage to get a lower mortgage payment and better interest rate.

FHA Loan Refinance Programs

  • FHA Streamline Refinance
  • FHA Cash-Out Refinance
  • Home Equity Conversion Mortgage (HECM)

 

  • FHA Streamline Refinance – Borrowers can quickly refinance their loan to a lower rate without much documentation with an FHA streamline refinance. Streamline refinancing works the same as a traditional refinance but requires less paperwork, no credit check, or income verification.
  • Cash-Out Refinance – FHA borrowers can turn their equity into cash with an FHA cash-out refinance. Borrow up to 80% of the loan-to-value ratio of the home.
  • Home Equity Conversion Mortgage – A HECM is a reverse mortgage available to homeowners 62 years of age and older to convert the equity in their home into a stream of income. You do not need to have an FHA loan to be eligible; homeowners with conventional loans can also use the HECM program.

 

Conventional Loan Refinance Programs

  • Rate and Term Refinance
  • Home Equity Loan and HELOC
  • Cash-Out Refinance

 

  • Rate and Term Refinance – A rate and term refinance is a traditional refinance where you refinance to get a lower interest rate and a new loan term. You need a 620 credit score, a maximum 43% debt-to-income ratio, with no late mortgage payments in the past 12 months.
  • Home Equity Loans and HELOChome equity loans use the equity in your home for a second mortgage. You can borrow up to 80% of the market value of the home. They require a 680+ credit score and have repayment terms of 5 to 15 years. A HELOC is the same as an equity loan; you are just given a line of credit instead of receiving a lumpsum payment.
  • Cash-Out Refinance – Conventional loans offer cash-out refinancing for homeowners who want to convert their home equity into cash. A cash-out refinance is not a second mortgage. It will pay off your original mortgage and give you a new mortgage and provide the loan for up to 80% of the LTV ratio in a single loan, with one mortgage payment.

 

First-Time Homebuyers

FHA Loans are Popular with First-Time Homebuyers

FHA loans are popular because first-time homebuyers need 3.5% down to qualify. But, there are conventional loan programs designed specifically for first-time buyers that require just 3% down. FHA loans do have more first-time buyer grants and programs than conventional loans.

Conventional Loan Programs for First-Time Homebuyers

HomeReady Loan Program – The HomeReady loan program, which requires just 3% down, was created by Fannie Mae to compete with the FHA‘s 3.5% down payment. HomeReady loans require a 620 credit score and have an income limit of 100% of the area median income.

Home Possible Loan Program – The Home Possible loan program is Freddie Mac’s version of the HomeReady program. Only first-time buyers that meet the income requirements are eligible with 3% down.

FHA loans vs HomeReady / Home Possible Conventional Loans

FHA Loans

HomeReady / Home Possible

Credit Score Requirement

580+

620+

Down Payment 

3.5%

3%

Upfront Insurance Premium

1.75%

Not required

Income limits

No income limits

100% of median income

Homebuyer Education

Not required

4-6 hours required

Income Sources

Only applicants income

Anyone living in the home

Frequently Asked Questions

What are the differences between FHA and conventional loans?

FHA loans have a lower credit score requirement of 580 compared to conventional loans, which require a 620 score. FHA requires a 3.5% down payment, while conventional loans have a 3% down payment program if you meet the income limits or have a 680+ credit score. FHA loans have lower loan limits, lower mortgage rates, higher debt-to-income ratios, and are only available for primary residences.

What are the benefits of a conventional home loan?

Conventional loans are available on a variety of properties, while FHA loans are only for primary residences. Conventional loans do not require private mortgage insurance (PMI) if you have at least 20% to put down.

Why do sellers prefer conventional over FHA?

FHA loans have strict property guidelines, so sellers worry that they may have to make repairs to the home before closing on the property.

What is the downside of an FHA loan?

FHA loans have lower loan limits, stricter property requirements, and require two types of mortgage insurance. An upfront MIP fee of 1.75% of the loan amount and an annual premium that’s included in your mortgage payment.

What is the minimum down payment on a conventional loan?

Conventional loans require between 3%-20% down. If you’re a first-time homebuyer, you may qualify for the HomeReady or Home Possible loan programs requiring just a 3% down payment.

The Bottom Line

Both conventional and FHA loans have their own advantages and disadvantages. FHA loans are best for borrowers without significant savings and less than perfect credit. Conventional loans are best for buyers, with 20% to put down because mortgage insurance is not required.

FHA Loans

  • 3.5% down with a 580 credit score
  • MIP required regardless of the down payment amount
  • Only for a primary residence

 

Conventional Loans

  • 3%-20% down payment
  • Minimum 620 credit score required
  • All property types eligible

 

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