Conventional vs. FHA Loans



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 Loans

FHA

FHA loans are a type of government-backed mortgage that is guaranteed by the Federal Housing Administration. The program is funded by mortgage insurance premiums (MIP) that is included in the monthly mortgage payment.

Conventional

Conventional loans are 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 companies.

Conventional loans have a higher credit score requirement of 620. There are conventional loan programs that require between a 3% – 20% down payment. If you have at least a 20% down payment, mortgage insurance is not required.

Comparison Chart

FHA Loans

Conventional Loans

Credit Score

500 with 10% down
580 with 3.5% down

620

Down Payment

10% down with 500 score
3.5% down with 580 score

3%-20%

Mortgage Insurance

Up-front MIP payment Monthly MIP payments

>10% down MIP cancels in 11 yrs 
<10% down MIP required for life of the loan

Monthly PMI payments

PMI is canceled when LTV ratio reaches 78%

Loan Limits

Low-cost area - $331,760
High-cost area - $765,600

Low-cost area - $510,400
High-cost area - $765,600

Debt-to-Income

43% - 50% max DTI depending on the lender

Max 43% DTI

Residence Type

Primary residence only

Primary residence
Second home
Vacation home
Investment property

Loan Requirements

2020 FHA Loan Requirements

• 580 credit score with 3.5% down

 500-579 score with 10% down

 Maximum 50% debt-to-income ratio

• Two years of stable employment and income history

 For primary residence only

 24 month waiting period after a foreclosure or bankruptcy

1% of student loan debt added to DTI ratio

More » FHA Loan Requirements

2020 Conventional Loan Requirements

• Minimum 620 credit score

• 3% - 20% down payment

• 36-48 month waiting period after a bankruptcy or foreclosure

• Maximum 43% debt-to-income ratio

• Two years of stable employment history

• Proof of income (W2's, tax returns)

More » Conventional Loan Requirements

Credit Requirements

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

Credit Score

Down Payment

500-579 credit score

3.5% down payment

580+ credit score

10% 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 Loans

Conventional Loan Type

Requirements

Conventional 95

5% down payment, 620 credit score, PMI required

Home Possible

First-time homebuyer, 3% down payment, income limits

Conventional 90

10% down payment, 620 credit score, PMI required

Piggyback 80/10/10
80% LTV conventional loan, 10% second loan, 10% down, no PMI
HomeReady

Fannie Mae program for first-time homebuyers with 3% down & 620 credit score

Conventional 97

3% down payment, 680 credit score, no income limits, PMI required

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.

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 conventional and FHA loans. However, since borrowers seeking FHA loans have lower credit scores on average, they can expect higher closing costs than a conventional mortgage.

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.

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

First-Time Homebuyers

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

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 do have more down payment assistance programs, and first-time buyer grants than conventional loans have.

FHA Loan

HomeReady / Home Possible Loan

Down Payment

580 with 3.5% down
500 with 10% down

3%

Minimum Credit Score

500-580

620

Income Limits

No income limit

80% of area median income
Varies by county

Mortgage Insurance

Up-front MIP payment
Monthly MIP payments

• >10% down MIP cancels in 11 yrs
• <10% down MIP required for the life of the loan

Monthly PMI payments

• PMI canceled when LTV ratio reaches 78%

Income Sources

Only applicant's income can be used

Can use income from parents, renters, or anyone else living in the home

Max loan-to-value

96.5%

97% LTV, 105% TLTV with Affordable Seconds, and 97% HTLTV for 1-unit properties

Homebuyer Education

Not required

4-6 hours of homeownership education courses
Cost: $75

Debt-to-income

43% - 50%

50%

Mortgage Insurance

FHA Loans

FHA Mortgage Insurance Duration

• Down payment of 10% or more MIP duration is 11 years 

• Down payment of less than 10% MIP will be required for the life of the loan

With an FHA loan, there are two types of mortgage insurance required. An upfront MIP fee of 1.75% of the loan amount and a monthly MIP  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

FHA Mortgage Insurance Premium Rates

Loan Amount $625,500 or less 

      Down payment

MIP rate

MIP duration

30-year fixed-rate mortgage

<10%

>10%

0.85%

0.80%

     Life of the loan

11 years

15-year fixed-rate mortgage

>10%

             0.45%
 0.70%
     Life of the loan

11 years

$625,500 Loan Amount or higher

Down payment

MIP rate

MIP duration

30-year fixed-rate mortgage

<10%

>10%

1.05%

1.00%

Life of the loan

11 years

15-year fixed-rate mortgage

<10%

>10%

             0.95%

0.70%

Life of the loan

11 years

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 between .50% – 1.00% of the loan amount.

Loan Limits

Conventional Loans

The Conventional loan limit is $510,400 in most areas of the U.S. The limit increases to $765,600 in certain high-cost areas.

2020 Conventional Loan Limits

# 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 Loans

FHA Loan limits are much lower, with the limit in most areas is $331,760. The loan limit increases to $765,600 in high-cost areas of the country.

Property Size

Low Cost Area "Floor"

High Cost Area "Ceiling"

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

One Unit

$331,760

$765,600

$1,148,400

Two units

$424,800

$980,325

$1,470,475

Three units

$513,450

$1,184,925

$1,777,375

Four units

$638,100

$1,472,550

$2,208,825 

See how much house you can afford using our calculator 

Debt-to-income Ratio

  • FHA – 50%
  • Conventional – 43%

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.

Eligible Properties

You can get a conventional loan on just about any type of property. FHA loans have stricter property requirements

FHA Eligible Property Types

Single-family homes

2-4 unit multifamily properties

Manufactured and mobile homes

Condos and Townhomes

Conventional Loan Eligible Property Types

• Single Family Homes

• Second homes and investment properties

• Condos and townhomes

• Rehab properties

• Multi-unit properties

• Planned unit developments (PUDs)

View Fannie Mae property requirements

Loan Terms

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.  After the initial period of 5 years, the interest rate and monthly payment increase annually.

A Conventional Mortgage with 20% Down is Cheaper

The upfront costs associated with obtaining an FHA-insured mortgage is lower than 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 initially, conventional loans are the cheapest option over the life of the loan.

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 – 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.

Frequently Asked Questions

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 they can close 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 a monthly MIP fee included in the 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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