Choosing between an FHA loan or a Conventional loan can be difficult depending on the scenario. Frankly, most mortgage loan officers don’t know how to truly determine the better option.CRED
In some instances, there is a clear-cut winner, but in other instances it takes a lot of analysis.
In our FHA vs Conventional Loan comparison breakdown below, we dive into the pros and cons of each program and the ultimate winner based on your scenario.
If you’re more interested in the chart and infographic for visual comparison, scroll to the bottom.
FHA vs Conventional Resources:
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Credit Score Requirement
FHA Credit Score
- 580 credit likely means you’re eligible for a purchase or cash out refinance. Lower scores are allowed assuming you have at least 10% equity in the home. For more information on home loans for people with bad credit, click on the link to read further.
Conventional Loan Credit Score
- 620 minimum credit required to be eligible for a purchase or refinance
FHA is the more flexible program not only when it comes to credit score required for a mortgage but also for overall debt-to-income ratio. FHA loans in general are easier to qualify for.
Waiting Periods for Significant Credit Issues
FHA Waiting Periods
- Short Sale – 3 years
- Foreclosure – 3 years
- Bankruptcy – 2 years
Conventional Waiting Periods
- Short Sale – 4 years
- Foreclosure – 7 years
- Bankruptcy – 4 years
If you’ve had a foreclosure, short sale or bankruptcy, FHA has the shortest waiting periods and will give you the opportunity to qualify to buy a new home much sooner than a Conventional loan will allow.
Down Payment Requirement
FHA Down Payment
Conventional Down Payment
With first-time buyers being able to qualify for 3% down on Conventional loans, the down payment difference is very miniscule. The FHA loan does have the superior option if you’re looking for a multi-family unit, but in typical situations the down payment requirements will be similar.
FHA Interest Rates
- Generally lower than Conventional loans, particularly for borrowers with lower credit.
Conventional Interest Rates
- Competitive, but often can be higher than other options.
FHA is a government-backed program created to make housing affordable, and because of that offers more competitive rates. Borrowers with lower credit score (under 700) will likely find FHA rates are drastically lower than Conventional loans.
FHA Loan Limits
- FHA loans are capped at $314,827 for 2019 in most counties throughout the US.
Conventional Loan Limits
- Capped at $484,350 in most counties throughout the US.
Loan limits can be higher in some high-cost counties throughout the US and if you’re buying a 2-4 unit property. Conventional loans as a whole though offer more flexibility and higher loan limits when it comes to the amount you’re eligible to borrow.
FHA Mortgage Insurance
- FHA requires two separate types of mortgage insurance: Upfront and Annual. The upfront fee amounts to 1.75% of the loan amount and can be financed into the loan at closing. The annual amount is set at .85% per year (if greater than 95% loan-to-value) and then broken down monthly and added to your mortgage payment.
- The annual mortgage insurance premium remains on for the life of the loan, unless the loan starts with less than 90% loan-to-value.
Conventional Mortgage Insurance
- Private Mortgage insurance is required if loan-to-value is greater than 80% (less than 20% down).
- PMI is priced using risk-based analysis, meaning it’s based on credit score and loan-to-value. Borrowers with higher scores and lower loan-to-values can have very affordable mortgage insurance, while borrowers with lower scores and less down can have very high mortgage insurance.
- PMI is cancellable once you reach 78% loan-to-value of the original appraised value
Winner: Tie (based on the individual)
A common misconception among borrowers (and loan officers) comparing mortgage loan options, is that Conventional loans win this category, but that’s simply because most fail to analyze the real numbers.
FHA offers better mortgage insurance premiums to borrowers with lower credit and down payments. By having a fixed percentage on their monthly mortgage insurance, a borrower with 600 credit pays the same as somebody with 700 credit.
Conventional penalizes borrowers with lower credit scores and down payments. A borrower with 620 credit and 5% down will likely pay $250 per month in PMI on a Conventional loan whereas about $150 per month on an FHA loan (Assuming a $215,000 purchase price).
FHA does have the additional upfront fee, however, since the FHA offers better rates – and sometimes significantly better rates – along with lower mortgage insurance, the upfront mortgage insurance can be offset by significantly lower payments.
Conventional does offer cancellable mortgage insurance, but that’s not as great of a benefit as some make it out to be. A borrower putting 3-5% down on a Conventional loan will carry PMI for 8-11 years. If you put 10% down you’ll still have it for 6 years. The average American stays in their mortgage for 4.5 years; so whether you sell your home or refinance, you likely won’t be in this loan a few years from now anyway and will likely never benefit from the ‘cancellable’ mortgage insurance.
Revised Winner: Conventional if you have good credit (700+) or a large down payment (10%+).
Revised Winner: FHA if you have under 700 credit or a lower down payment (under 10%).
FHA Loan Purpose
- FHA loans only allow for financing on primary residences
- Allows for financing on primary homes, second homes (vacation properties) and rental (investment) properties
Conventional loans are the only program in the country that allow financing on second home and investment properties. It’s important to note that the Conventional loan down payment increases quite a bit if you’re planning on buying something other than a primary residence.
Minimum Property Requirements
FHA Property Requirements
- FHA has strict standards for the property to be considered an FHA approved home. The home must be in good shape and be needing minimal repairs.
Conventional Property Requirements
- Conventional loans have property requirements but they’re much more lenient than FHA loans.
If you’re buying a home in need of repair, that has peeling paint or an older roof, a Conventional loan is likely the better route.
Conventional vs FHA Summary
The battle of FHA vs Conventional is an easy one that people overcomplicate. In the tally above, Conventional loans win by a very small margin.
Conventional loans generally are ideal if you’re looking for a second home, investment property, have good credit or need higher loan amounts.
FHA Loan Requirements are more flexible and are better suited for borrowers purchasing a primary home that have lower credit and lower down payments. Any borrower under 700 credit looking to put less than 10% down, needs to strongly consider the FHA program. The lower the score is below 700, the more likely FHA makes sense.
FHA vs Conventional Comparison Chart