Whats the difference between an fha and a conventional loan

If you’re shopping for a mortgage, you may be wondering whether to opt for a conventional loan or an FHA loan.

Table of Contents Show

Which is a better loan FHA or conventional?
What is the downside of a conventional loan?
Why is a conventional loan preferred over FHA?

Federal Housing Administration (FHA) mortgage loans are government-insured, not government-issued, loans that allow home buyers and homeowners with less-than-ideal credit and smaller down payments to purchase a home, refinance their existing mortgage or renovate a home.

Meanwhile, a conventional mortgage loan is one that’s not insured or guaranteed by the government and is instead available through private lenders like banks, credit unions and mortgage companies.

Main differences between conventional and FHA loans

	FHA loan	Conventional loan
Credit scores	At least 580 (and sometimes 500)	At least 620
Down payment	At least 3.5%	Minimum of 3% but borrowers with lower credit scores or higher DTI ratios will likely be required to put down more
Who is it meant for?	First-time buyers	Borrowers with strong credit
Debt-to-income ratio	50% or less	Maximum of 45%
Mortgage insurance	Borrowers who put less than 10% down must have insurance until the entire loan term is over, if you put down at least 10%, the upfront mortgage insurance premium can be removed after 11 years of payments.	Only required if you put less than 20% down. You can request to remove PMI when you reach 20% home equity, and if your mortgage balance reaches 78% of the original purchase price, the servicer must terminate PMI.
Limits	In 2022, FHA loan limit for single-unit properties range from $420,680 in low-cost areas to $970,800 in high-cost areas.	In 2022, conventional home loan limits for one-unit properties is $647,200
Refinancing situation	Streamline refinance available. Streamline refinancing reuses the original loan’s paperwork to speed up the refinancing process.	No streamline refinance option

Who an FHA loan makes sense for

FHA loans may make the most sense if your credit score is a bit lower, you’ve had some recent financial hiccups or you’re a first-time buyer.

Pros and cons of FHA loans:

Pros	Cons
It’s easier to qualify with a lower credit score	Mortgage insurance premiums are required upfront as well as annually
Require less elapsed time for major credit problems like a bankruptcy	The highest loan amount a borrower can take out with an FHA home loan is $970,800 for a single-family home loan in a high-cost area (but note that these amounts vary by area)
May offer competitive fixed-interest rates (and in some cases lower interest rates than conventional loans)	May require more paperwork than a conventional loan

Indeed, FHA loans typically require credit scores of 580 and above, while the minimum for a conventional loan is 620 with many lenders requiring higher scores— and FHA loans are generally easier to qualify for as a result.

FHA loans also require less elapsed time for major credit problems like foreclosures or bankruptcies. You can apply for an FHA loan two years after the date of discharge on a Chapter 7 bankruptcy and 12 months after a Chapter 13 discharge, assuming you’ve made 12 on-time bankruptcy payments and have written permission from the court to enter into a new mortgage.

For first-time homebuyers who aren’t cashing out of a house, FHA loans can be appealing because they often require less money down. Marketwatch Picks highlighted the details of FHA loans, including the interest rate that accompanies them, the credit score needed to be approved for one and more.

For FHA loans, a borrower can also use a non-occupant co-borrower who is a relative to help qualify for the loan. Working with a qualified loan officer can help you determine which loan type makes the most sense for your personal financial situation.

(See the lowest mortgage rates you may qualify for here.)

Who a conventional loan makes sense for

Meanwhile, conventional loans make sense for borrowers with high credit scores looking to avoid anciallary costs like mortgage insurance; though private mortgage insurance (PMI) is required for loans in which borrowers put down less than 20%, it can be lifted once your home reaches 20% in equity.

But conventional loans may come with higher interest rates than FHA loans do and they can be harder to qualify for those with less-than-stellar financials.

There’s one more potential downside, according to Jonathan Lee, vice president of Zillow Home Loans. “A conventional loan is not assumable, unlike an FHA home loan which can be assumed by a new FHA borrower who meets the application criteria,” says Lee.

Pros and cons of conventional loans

Pros	Cons
Require less paperwork than FHA loans	Larger down payment may often required for conventional loan vs. FHA loan, but not always
You may pay taxes and insurance directly instead of adding them to your monthly mortgage payment	Higher credit score requirements
Mortgage insurance isn’t required if you meet the 80% loan-to-value (LTV) threshold; you can calculate your LTV by dividing the amount borrowed by the appraised value of the home, expressed as a percentage	Insurance is required for loans above 80% LTV

(See the lowest mortgage rates you may qualify for here.)

Frequently asked questions

Which is a better loan, FHA or conventional?

Both an FHA and conventional home loan can be a good option depending on a borrower’s specific needs.

“FHA loans usually have less strict lending standards than conventional loans do, so they may be easier to qualify for — especially for borrowers with lower incomes and credit scores,” says says Jacob Channel, senior economist at LendingTree.

One big downside of FHA loans is that they require an FHA Mortgage Insurance Premium (MIP) which doesn’t go away unless a FHA borrower refinances to a conventional loan and can make an FHA loan’s monthly payment more costly.

“Mortgage insurance tends to be less expensive on FHA loans for borrowers with credit scores under 740, but for borrowers with credit scores of 740 or higher, a conventional home loan with private mortgage insurance tends to be more economical,” says Holden Lewis, home and mortgage expert at NerdWallet.

If you’re a first-time buyer or someone with a weaker credit score, then an FHA mortgage loan can be easier to qualify for. However, if you can put 20% or more toward a down payment and want to look a bit stronger to prospective sellers, then a conventional loan may be your best bet,” says Channel.

If you’re not sure what kind of loan you should seek out, get in touch with a mortgage lender and explain your financial situation to them so they can tailor advice to your specific wants and needs.

(See the lowest mortgage rates you may qualify for here.)

Are FHA loans more expensive than conventional loans?

Conventional loans may come with slightly higher rates than FHA loans do, but the inclusion of permanent MIP on FHA loans could offset their slightly lower rates. “If you get a conventional home loan with a down payment of less than 20%, then you may also need to pay Private Mortgage Insurance (PMI) on your loan, but that will automatically go away once your loan to value ratio drops to 78%,” says Channel.

In a nutshell, depending on the size of your down payment, an FHA mortgage loan could be less expensive in the short term, but once you no longer have to pay for PMI on your conventional loan, it could end up being the less expensive option.

Why do sellers prefer conventional over FHA?

Lewis says there’s a perception that FHA appraisals are persnickety. “To be eligible for an FHA buyer, the house can’t have a leaking roof or peeling paint or non-functioning windows,” says Lewis.

“Because FHA loans have easier qualification requirements than conventional financing does, some sellers may view FHA borrowers as less financially secure than borrowers who get conventional loans. If you’re a seller who is concerned that a sale could fall through at the last minute due to a buyer’s wobbly financial situation, then you might be attracted to buyers who you perceive as being in the best possible financial situation,” says Channel.

That said, as long as a buyer is prequalified, then the specific type of loan they have probably isn’t going to make much difference to the majority of sellers.

Why would you choose an FHA loan over a conventional loan?

If you have trouble qualifying for a conventional loan because you don’t have good credit or a high enough credit score, you might want to choose an easier-to-qualify-for FHA loan. “The mortgage insurance payments would cost less than for private mortgage insurance if your credit score is below 740,” says Lewis.

Another reason someone might choose an FHA loan over a conventional financing is that it’s assumable; when you sell the house, the buyer may be able to take over your loan. “If you believe mortgage rates will be higher when you sell, then an assumable loan could be a marketing advantage,” says Lewis.

Lee says an FHA loan is a great option for first-time buyers. The down payment is 3.5%, buyers are able to ask for a seller concession up to 6% of the sales price and gift funds from a family member are acceptable. “This allows buyers to purchase their first home with the least loan amount out of pocket and begin building equity,” says Lee.

(See the lowest mortgage rates you may qualify for here.)

What is the Federal Housing Finance Agency (FHFA)?

This independent regulatory agency provides supervision, regulation and housing mission oversight for Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Credit union loans tend to offer competitive rates and terms in addition to flexible lending criteria and if the credit union is FHA-approved, you can get an FHA loan. Credit unions also offer conventional loans. If approved, the lender makes direct payments to the seller while the homeowner makes payment installments over a predetermined period of time.

What is a USDA loan?

Like FHA loans, USDA loans are government loans, though these are offered to rural property owners by the United States Department of Agriculture; unlike FHA loans, which require minimal down payments, USDA loans may require no down payment at all.

What is a VA loan?

Meanwhile, VA loans are guaranteed by the United States Department of Veterans Affairs, but they’re provided by private lenders such as banks and mortgage companies. Similar to USDA loans, they don’t require a down payment, but they’re intended for borrowers who have served in the military, are currently serving or have eligible status as a military spouse.

What is a conforming loan?

Conforming loans are the same as conventional loans, and they meet Fannie Mae and Freddie Mac guidelines.

The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.

Which is a better loan FHA or conventional?

A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option.

What is the downside of a conventional loan?

Tougher credit score requirements than for government loan programs. Conventional loans often require a credit score of at least 620, which leaves out some homebuyers. Even if you qualify, you will likely pay a higher interest rate than if you had good credit.

Why is a conventional loan preferred over FHA?

There are two situations when a seller should choose a Conventional offer over an FHA offer. First, if the property has safety issues or things that need to be fixed, a Conventional appraisal will be less likely to point out those issues while an FHA appraiser will require those to be fixed prior to closing.