FHA Vs Conventional: What Homebuyers Need to know
Buying a home is the largest investment most of us make in our lifetimes, and choosing the right mortgage is one of the most important decisions homebuyers face.
Two of the most common options are FHA loans and Conventional loans. While both can be the key to unlocking homeownership, they have differences in terms of credit score requirements, down payments, mortgage insurance and overall costs.
Whether you’re a first-time home buyer looking for a low down payment or a borrower with strong credit aiming for long-term savings, understanding the pros and cons of each loan type is essential. In this guide, we’ll break down FHA vs Conventional loans to help you determine which one best fits your unique financial situation and homebuying goals.
What is FHA?
FHA is an acronym for the Federal Housing Administration. An FHA loan is a government-backed mortgage designed to help buyers who may not qualify for conventional loans. FHA loans are insured by the federal government, reducing risk for lenders. Compared to conventional loans, FHA loans provide homebuyers with benefits such as:
- Lower Credit Score Requirements – Qualifying scores are typically 580+ for a 3.5% down payment.
- Smaller Down Payments – As low as 3.5% (Speak with a Loan Officer in your area about low-to-no down payment program options)
- More Flexible Debt-to-income (DTI) Ratios – Typical qualifying ratio is 43% or less.
- Less Strict Approval Standards – Particularly for first-time homebuyers or those with past financial hardships.
While FHA loans make homeownership accessible to more Americans, they come with mortgage insurance premiums (MIP), which are required for the life of the loan unless refinanced into a conventional mortgage. FHA loans also have loan limits, which vary by location and may not be enough to cover higher-priced homes.
What are Conventional Loans?
Unlike FHA, VA, or USDA loans, conventional loans are not backed by the government. Instead, these products must conform to standards set by Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are two examples of “government-sponsored enterprises” (GSEs) that buy mortgages from lenders and package them into securities. These financial institutions serve the purpose of providing liquidity, stability, and affordability to the mortgage market.
Types of Conventional Loans
Conventional loans are split into two categories – conforming and non-conforming.
- Conforming loans – Conventional loans that meet the loan limits and credit guidelines set by our dear friends Fannie and Freddie introduced above.
- Non-conforming loans – Conventional loans that don’t meet those requirements. Non-conforming loans are often referred to as “Jumbo” loans, because they exceed the conforming loan limits and are used to finance higher-priced homes.
Conventional loans offer flexible down payment options (as low as 3% for first-time homebuyers) and have no upfront mortgage insurance. Unlike with FHA loans, PMI can be removed once you reach 20% equity in your home.
Generally, a conventional loan is cheaper than an FHA over the life of the loan. If you have good credit and can put down a larger down payment, you can benefit from lower mortgage insurance premiums and (potentially), slightly lower rates.
Considerations
While both FHA and Conventional loans have their pros and cons, both are great options that can help you become a homeowner. Deciding between the two is a decision based on your unique situation, qualifying factors (credit score, DTI, income), and long-term financial goals.
When you’re ready to get started, the trusted experts here at Summit will guide you through each step of the home financing process.
