FHA vs. Conventional Loan

One of the key differences that emerge between FHA vs. conventional mortgages is the down payment. The size of your down payment will differ in these situations, which is an important consideration when evaluating your overall financial situation. 

With the FHA loan, you can put down less than 20% for your down payment, depending on your credit score. For example, if your score is 580 or higher, you can put down 3.5% as the down payment. 

You’ll see debt-to-income ratio come up a lot in the lending process, which essentially refers to how much you earn versus how much you owe. You’ll need to take into account all your monthly payments, including loans and credit cards, as well as any recurring monthly fixed costs to work out what your DTI is. 

There are more stringent requirements when evaluating the debt-to-income ratio to qualify for a conventional mortgage than an FHA loan. The FHA loan typically looks for a debt-to-income ratio of 55% or below, while the conventional mortgage requires 50% or less. 

While both FHA loans and conventional home loans look at credit scores as part of the evaluation process, there are varying requirements in place. FHA loans are accessible home loans for lower credit scores, going down to 500. While the preferred credit score for FHA loans is 580, there is leeway for those that might be a bit lower than that. However, the lower credit score comes with stricter requirements around the down payment amount and DTI. 

There might also be a higher annual percentage rate with a lower credit score with an FHA loan. Conventional mortgages, on the other hand, generally require a credit score of 620 or higher as part of their minimum qualification, although it may vary depending on the lender. 

Mortgage insurance is another variable to consider when looking at FHA vs. conventional mortgages. Depending on the loan amount and down payment, a private mortgage insurance (PMI) premium may be applied with a conventional mortgage. Certain instances, such as when the down payment is less than 20%, require mortgage insurance. If PMI is required, that can increase the monthly mortgage payment. However, FHA loans require a mortgage insurance premium (MIP) regardless of the down payment amount, and they last for the life of the loan, in most cases. 

The condition of the property being purchased, as well as how it will be used, particularly in low-cost areas, is another factor to consider when evaluating FHA vs. conventional mortgages. Compared to conventional mortgages, FHA loan appraisals take far more into consideration as the property must meet FHA Minimum Property Standards. For example, with the FHA loan appraisal, the property value is assessed and the home’s construction and condition must adhere to health and safety standards. 

Moreover, the intended use of the home also matters as FHA loans can only be used to purchase a primary residence, they cannot be used to buy investment properties, vacation homes, or second homes. Conventional home loans, in comparison, can be used for primary, second, vacation, or investment home purchases.