FHA vs Conventional Loans
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 are great for borrowers with lower credit scores and smaller down payments. Conventional loans are great for borrowers with good credit scores and can be used on primary, secondary, or investment homes.
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 and second homes.
- Investment properties are not eligible.
- Borrowers can put as little as 3.5% down.
- A minimum credit score of 620 is required
- 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 monthly for the life of the loan.
- Loan limits tend to be lower.
- Great for borrowers with lower 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)through the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
- Non-conforming loans do not follow the guidelines set by FHFA due to:
- Loans having higher credit score requirements.
- Loan sizes above the annually set conforming loan limits.
- Must have a debt-to-income ratio of 43% or lower—this may vary by 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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