FHA vs Conventional Loans

FHA vs Conventional


Summary: FHA and Conventional loan programs are two very common types of mortgages that allow borrowers in a wide range of financial situations to become homeowners. FHA Loans are insured by the Federal Housing Administration and great for borrowers with low credit scores and low down payment options. Conventional loans are great for borrowers with good credit scores and can be used on primary, secondary, or investment homes.

FHA and Conventional loan programs are two very common types of mortgages that allow borrowers in a wide range of financial situations to become homeowners. Each loan is tailored to help homeowners in distinct ways.

FHA Loans

  • Insured by the Federal Housing Administration and backed by the government.
  • Used to purchase primary homes.
    • Investment properties are not eligible.
  • Borrowers can put as little as 3.5% down.
  • A minimum credit score of 580 is required
    • A 500 credit score can be accepted if borrowers put 10% down on the home– contact your mortgage lender for their current requirements.
  • Borrowers should aim to have a debt-to-income ratio of 57% or lower.
  • Borrowers pay two types of mortgage insurance:
    • One upfront at closing
    • One paid annually for the life of the loan if less than 10% is put down on the home.
  • Loan limits tend to be lower.
  • Great for borrowers with low credit scores.

Conventional Loans

  • Can be used for a primary, secondary, or investment home.
  • Comes in two forms: conforming and non-conforming.
    • Conforming loans follow guidelines regulated by the Federal Housing Finance Agency (FHFA). Guidelines include:
      • Credit scores
      • Size of the loan
      • Debt
    • Non-conforming loans do not follow the guidelines set by FHFA due to:
      • Loans having higher credit score requirements.
      • Size of the loans being larger.
  • Must have a debt-to-income ratio of 43% or lower—this varies depending on lender.
  • Minimum credit score of 620 is required—contact your mortgage lender for their current requirements.
  • Private Mortgage Insurance is required for homes with less than 20% in equity.
  • Great for borrowers with good credit scores or buyers looking for a second home or investment property.

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