FHA Vs. Conventional Loans | Bankrate


Conventional loans are mortgages that aren’t backed by the government. They are available through the majority of mortgage lenders in the U.S. — including banks, credit unions and online lenders — and can come in a range of terms, commonly 15 or 30 years, with a fixed or adjustable interest rate.

Depending on the characteristics of the loan, a conventional mortgage is either conforming or nonconforming. Often, conventional lenders sell these types of mortgages to Fannie Mae or Freddie Mac after they’re funded. In order to do this, the loan has to conform to, or meet, Fannie and Freddie standards around credit score, loan size and other factors. If it doesn’t, the mortgage is considered nonconforming.

In contrast, FHA loans are backed by the Federal Housing Administration (FHA), meaning the FHA protects FHA-approved mortgage lenders against loss if a borrower stops paying their mortgage. FHA loans are designed to help homebuyers who might have difficulty obtaining conventional financing, primarily by having a lower minimum credit score requirement and other flexible qualification criteria.

Both kinds of loans require the borrower to pay mortgage insurance if putting down less than 20 percent, but with conventional loans, the borrower can stop paying for insurance when they reach 20 percent equity in the home (such as by paying down the mortgage). Most FHA loan borrowers continue to pay insurance for the entire loan term, regardless of equity level.

Conventional vs. FHA loan credit score

FHA loan borrowers can qualify with a credit score as low as 500 or 580 depending on their down payment amount: as low as 500 with 10 percent down, or as low as 580 with 3.5 percent down. Conventional loans usually require a credit score of at least 620. If you have excellent or good credit, a conventional loan is often the better choice.

Conventional vs. FHA DTI ratio

For a conforming conventional loan, the maximum debt-to-income (DTI) ratio is 43 percent. For an FHA loan, the DTI ratio can go up to 50 percent. The DTI ratio is the measure of all your debt (the mortgage included) relative to your monthly income.

Conventional vs. FHA down payment

Depending on the lender and program, some conventional loans require as little as 3 percent or 5 percent for a down payment. If your credit score is at least 580, you can put down just 3.5 percent for an FHA loan; if your score is below 580 (but not lower than 500), you’ll be required to put down 10 percent. Here’s more on minimum down payment requirements.

For either loan, if you put down less than 20 percent, you’ll be required to pay for mortgage insurance.

Conventional vs. FHA loan limits

Both types of loans have limits on the amount you can borrow. The conventional conforming loan limit, set by the Federal Housing Finance Agency each year, is $647,200 or up to $970,800 in more costly housing markets. A conventional loan can exceed these limits, however — at that point, it’d be considered a nonconforming jumbo loan.

The FHA loan limit is also adjusted each year, and there are different limits based on location and property type. In 2022, the FHA loan limit for a single-family home is $420,680 in most markets, and $970,800 in higher-cost areas.

Conventional vs. FHA mortgage insurance

If you don’t have 20 percent of the home’s purchase price for a down payment, you’ll be required to pay for mortgage insurance whether you’re getting a conventional or FHA loan. Both premiums are typically paid via your monthly mortgage payment.

FHA mortgage insurance includes an upfront premium equal to 1.75 percent of the amount you’re borrowing. Then, you’ll pay an annual premium, which is determined by the size of your down payment, how much you borrowed and the length of the loan (15 years versus 30 years).

Aside from differences in premium structure, conventional loan borrowers don’t have to pay for mortgage insurance forever — it can be canceled once there’s 20 percent equity in the home. You can do this simply by following your repayment schedule to pay down the loan balance; making extra payments; or refinancing if your home’s value has risen substantially.

In contrast, FHA mortgage insurance can’t be canceled unless you put at least 10 percent down. (If so, it’ll be canceled after 11 years.)

Conventional vs. FHA rates

While your interest rate is primarily determined by your credit score, the type of loan can also be a factor. FHA loans sometimes have more favorable rates. Currently, the average 30-year fixed mortgage rate for a conventional conforming loan is 5.990%, according to Bankrate’s national survey of large lenders. The average 30-year fixed FHA mortgage rate is 5.030%.

How to decide which is right for you

While each borrower has unique circumstances, generally, a conventional loan is best for those with strong credit and a bigger homebuying budget. FHA loans are geared toward those who have lower credit scores. Ultimately, the decision comes down to the type of home you want and your financial situation. Consult with a loan officer to weigh your options.

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