The Difference Between an FHA and Conventional Loan
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April 8, 2022

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If you’re considering buying a home, you’re probably already trying to figure out the best mortgage options. Depending on your situation, there are several mortgage options available. 

Both FHA and conventional loans offer mortgages to first-time homebuyers and homeowners looking to refinance their mortgages

FHA loans and conventional purchase loans are among the most popular options for homebuyers. 

We’ll focus on the difference between FHA and conventional loans in this post.

Conventional mortgage loans and FHA loans—mortgages that the federal government backs have different qualification requirements and offer different advantages for homebuyers. 

FHA vs. conventional loans

An FHA loan is a mortgage loan that the Federal Housing Administration (FHA) insures. 

Private lenders issue these loans, but lenders are protected from losses by the FHA if the homeowner cannot repay the loan amount. 

The federal government sets FHA eligibility requirements and they are applied to the loan regardless of which lender you choose.

Private lenders offer conventional loans, which are not federally insured, meaning that the federal government doesn’t back them. 

Conventional loan eligibility requirements can vary depending on the mortgage lender. 

The difference between FHA and conventional loan

The key difference between FHA loans and conventional home purchase loans is the federal government’s involvement. 

Because the government doesn’t back conventional mortgage loans, the lender assumes a more significant risk when they approve a loan. 

FHA loans are less risky for lenders because the FHA backs them. They typically have better rates for borrowers.

But government backing isn’t the only difference between FHA loans and conventional mortgages. Other differences include:

  • Appraisal requirements
  • Minimum down payments
  • Debt-to-income ratios
  • Credit score
  • Mortgage rates

Appraisal requirements

A home appraisal is a written report performed by a qualified independent appraiser.

They evaluate if your home has any significant historical value compared to the comparable recent home sales in the neighborhood. 

An appraisal doesn’t replace the need or benefit of a complete home inspection. 

Still, underwriters and mortgage lenders use appraisals to decide whether your property meets the minimum property standards

FHA loan appraisals

​​FHA loans require borrowers to complete a specific, more stringent appraisal that focuses on identifying safety hazards and other repairs that need to be addressed before closing. 

Conventional loan appraisals

Conventional loans require a home appraisal to ensure the lender isn’t financing the home for more than its worth. 

Minimum down payments

A down payment is the amount of money a borrower pays up-front as part of the mortgage process and is based on the total purchase price of the property you want to buy. 

FHA loans minimum down payment

Borrowers with a credit score of 500 are typically required to pay a down payment of 10% of the purchase price of the home.

But buyers with a credit score of at least 580 can typically buy a home with a 3.5% down payment.

Conventional loans minimum down payment

Borrowers with a good credit score can often purchase a home with a 3% down payment.

Conventional loan down payment options typically range between 5% and 20% of the home’s purchase price.

While a 20% down payment is generally assumed to be required, that’s not always the case.

The borrower can pay less than 20% for a down payment amount but they’ll also need private mortgage insurance.

Private mortgage insurance is a monthly fee, separate from your monthly mortgage payment, that protects the lender in the case of a default.

In addition to a monthly mortgage insurance payment, an upfront mortgage insurance premium is also required upon closing.

Debt-to-income ratio (DTI)

Debt-to-income (DTI) refers to how much money you pay toward your monthly debt divided by your total monthly income.

Both conventional and FHA home loans have DTI guidelines that borrowers must meet to be eligible for a mortgage.

FHA loans maximum DTI

Borrowers with a credit score of 500 must have a DTI of at or below 43%.

Those with a credit score of 580 or more must have a DTI between 43–50%.

Conventional loans maximum DTI

DTI requirements can vary by lender, but generally, borrowers with a credit score less than 740 must have a DTI between 33-36%. 

Borrowers with a credit score of 740 or more must have a DTI between 36-45%.

Credit score

Your credit score can affect your loan eligibility, and the mortgage rates lenders can offer. 

Credit scores are measured between 850 points (excellent credit) and 300 points (poor credit). 

The better your credit score, i.e., the higher your credit score number, the easier it is to get approved for a home loan, and the lower mortgage rates lenders can offer. 

FHA loans and conventional mortgages have different credit score requirements, offering home buying options for borrowers at any credit level.

FHA loans minimum credit score

Borrowers with a credit score of at least 500 can apply for an FHA loan. A 10% down payment is typically required for FHA loans with credit scores less than 580.

Because the FHA backs these home loans, FHA loans can accept borrowers with lower credit scores.

Conventional loans minimum credit score

The minimum credit score borrowers need for a conventional home loan can vary depending on your lender. However, conventional loans typically require a credit score of at least 620.

Conventional loans typically require a higher credit score because borrowers with better credit are viewed as less risky to lenders than lower credit score borrowers.

A low credit score can mean higher mortgage rates.

Mortgage rates

FHA mortgage rates are generally lower compared to conventional loans. 

For example, the typical FHA rate has remained below 10% of average annual rates for the last decade, while conventional rates remain at less than 2%.

However, several factors can impact mortgage rates and vary depending on your lender. 

In general, lenders consider the following points when determining a borrower’s mortgage rate:  

  • Credit score 
  • Loan amount 
  • How much down payment you are paying
  • Type of loan 
  • Current interest rates
  • Whether you have an adjustable-rate or fixed-rate mortgage 

Typically a low credit score means higher interest rates and a higher credit score means lower interest rates. 

Adjustable-rate mortgages (ARM) vs. fixed-rate mortgages

Monthly ARM payments fluctuate depending upon interest rates and when your ARM expires. 

Fixed-rate mortgage payments have the lifetime of your mortgage. 

Alternatives financing options 

If you’re not a first-time homeowner but you’re not happy with your current mortgage, the FHA also offers a refinance product. 

The FHA streamline refinance program is for homeowners interested in mortgage refinancing and can be a great option to lower your monthly payment. 

In addition, the Department of Veteran Affairs (VA) offers government-insured home loans for Military service members and eligible surviving spouses. 

The VA loan program helps home buyers purchase their home with no down payment. 

And as its name implies, the VA Interest Rate Reduction Loan helps homeowners reduce their mortgage interest rate through mortgage refinancing. 

Next steps with Assist Home Loans

Choosing the best loan for your family relies on researching your mortgage options before deciding. 

The main difference is that FHA loans are backed by the federal housing administration, while conventional loans aren’t. Borrowers feel this in the different qualification and payment requirements for each loan.

If you’re considering purchasing a new house or refinancing your current mortgage, have questions about whether an FHA or conventional loan is best for you, reach out to the home loan specialists at Assist Home Loans today. 

Our experienced team is ready to help you reach your financing goals.

Photo by RODNAE Productions

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