Housing Finances FHA vs. Conventional Loans: Which Is Better? Read the Article Open Share Drawer Share this:Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new window)Click to share on Tumblr (Opens in new window)Click to share on Pinterest (Opens in new window)Click to share on LinkedIn (Opens in new window) Written by Mint Modified Jun 30, 2022 7 min read Advertising Disclosure The views expressed on this blog are those of the bloggers, and not necessarily those of Intuit. Third-party blogger may have received compensation for their time and services. Click here to read full disclosure on third-party bloggers. This blog does not provide legal, financial, accounting or tax advice. The content on this blog is "as is" and carries no warranties. Intuit does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. After 20 days, comments are closed on posts. Intuit may, but has no obligation to, monitor comments. Comments that include profanity or abusive language will not be posted. Click here to read full Terms of Service. Save more, spend smarter, and make your money go further Sign up for Free When it comes to affording a new home, you have a few types of home loans to choose from. Prospective homebuyers often compare the FHA vs. the conventional loan when researching loans. Each loan type has certain stereotypes associated with them, but we are here to give you the facts about both FHA and conventional loans. This post will help you understand what each loan is, familiarize you with the differences between them, and provide some guidelines for how to pick which one is best for you. What Is An FHA Loan? An FHA loan is insured by the Federal Housing Administration (FHA). These loans are issued by private lenders, but lenders are protected from losses by the FHA if the homeowner fails to repay. FHA loans are generally used to refinance or buy a home. What Is A Conventional Loan? A conventional loan is supplied by a private lender and isn’t federally insured. Requirements for obtaining a conventional loan vary depending on the lender. When used to buy property, conventional loans are typically known as mortgages. Differences Between FHA and Conventional Loans The main difference between FHA and conventional loans is whether or not they are insured by the federal government. Conventional loans aren’t federally backed, so it’s riskier for the lender to loan money. On the other hand, FHA loans are protected by the government, and as a result of less risk, they can typically offer better deals. This difference in federal insurance is the reason why FHA and conventional loans vary when it comes to the details of the loan. Keep reading to learn the differences regarding credit requirements, minimum down payments, debt-to-income ratios, loan limits, mortgage insurance, and closing costs. FHA LoanConventional LoanMinimum Credit Score500620Minimum Down Payment3.5%3%Maximum Debt-to-Income RatioCredit score of 500: 43%Credit score of 580+: 43-50%Credit score of 620: 33-36%Credit score of 740+: 36-45%Loan LimitsLow-cost counties: $356,362High-cost counties: $822,375Contiguous US: $548,250High-cost counties, AK, HI, and US territories: $822,375Mortgage InsuranceMortgage insurance premiums required.Private mortgage insurance required with down payments less than 20%.Property StandardsStricter standards, property purchased must be a primary residence.Flexible standards, property purchased doesn’t have to be a primary residence. Sources: FHA Single Family Housing Policy Handbook | Fannie Mae 1 2 | Federal Housing Finance Agency | Freddie Mac | HUD 1 2 | Consumer Financial Protection Bureau 1 2 Credit Score Your credit score is a determining factor in your loan eligibility. Your credit score is measured on a scale of 300 (poor credit) to 850 (excellent credit). Good credit helps you get approved for loans more easily and at better rates. FHA and conventional loans differ in their credit score requirements and represent financial options for individuals at either end of the credit spectrum. Minimum Credit Score for FHA Loan: 500 Accepts a credit score as low as 500, but usually with a 10% down paymentThese loans accept lower credit scores because they are insuredNote: Some lenders may only issue FHA loans with higher credit scores Minimum Credit Score for Conventional Loan: 620 Accepted score may vary from lender to lenderThese loans are usually offered to individuals with strong credit because they present less risk to lenders Minimum Down Payment A down payment is the sum of money that is paid as a percentage of your purchase up-front. Minimum Down Payment on an FHA loan: 10% of your purchase with 500 credit score3.5% of your purchase with 580+ credit score Minimum Down Payment on a Conventional Loan: 3% of your purchase can be put down with good credit5% to 20% of your purchase price is typical Debt-to-Income Ratio Your debt-to-income ratio is the amount of money paid toward debt each month divided by your total monthly income. To be eligible for a loan, you must be at or below the maximum debt-to-income (DTI) ratio. Maximum DTI Ratio Guidelines for FHA loans: 43% with a credit score of 50043–50% with a credit score of 580 Maximum DTI Ratio Guidelines For Conventional Loans: 33-36% with a credit score lower than 74036-45% with a credit score of 740 or higher50% highest allowed through Fannie Mae Loan Limits Both FHA and conventional loans have limits on the amount that you can borrow. Loan limits vary based on your location and the year your loan is borrowed. Find 2021 loan limits specific to your county through the Federal Housing Finance Agency. 2021 FHA Loan Limits High-cost counties: $822,375Low-cost counties: $356,362 2021 Conventional Loan Limits Contiguous US (excluding high-cost counties): $548,250Alaska, Hawaii, US territories, and high-cost counties: $822,375 Mortgage Insurance Mortgage insurance is taken out to protect the lender from losses in case you fail to repay your loan. Whether you will pay private mortgage insurance or mortgage insurance premiums is based on your loan type and down payment percentage. FHA Loan Mortgage insurance is required for all FHA loans.It is paid to the FHA in the form of mortgage insurance premiums and includes an up-front and monthly premium.MIP payments last the entire life of your FHA loan.To get rid of MIPs after paying 20% of your loan, you can choose to refinance into a conventional loan. Conventional Loan Private mortgage insurance (PMI) is only required when a down payment below 20% is made.PMI comes in different forms: monthly premium, up-front premium, and split premiums.PMI requirements stop once you have met one of three requirements: Principal loan amount is reduced to 80% before the loan term ends. At least 78% of the principal balance is scheduled to be paid down. The halfway point of your loan term has passed. Property Standards There are different property standards that must be met to use each loan. FHA loans have stricter requirements, while conventional loans have more flexibility. FHA Loan Property purchased with FHA loans must be your principal residence, meaning the borrower has to occupy the residenceFHA loans can’t be used to invest in property (e.g., renting out or flipping)Title must be in the borrower’s name or name of a living trust Conventional Loan Property purchased with a conventional loan doesn’t have to be a principal residence — second or third residences are allowedConventional loans can be used to purchase investment properties Pros and Cons of FHA vs. Conventional Loans As a result of the various differences between FHA and conventional loans, each type has its respective pros and cons. FHA Loan Conventional Loan Pros Qualify with low credit and high DTI Smaller down payments overall More affordable with low credit Lowest option for down payments with good credit PMI cancellable More affordable with good credit Property doesn’t have to be your main home Cons Mortgage insurance premiums required for life of loan Property purchased must be your main home Need higher credit and lower DTI to qualify Typically has larger down payments PMI required with a down payment less than 20% Pros and Cons of FHA Loans FHA loans are government-regulated and insured to extend flexible opportunities for homeownership. They’re flexible regarding credit and DTI, but stricter about insurance and property standards. Pros Flexible qualification with low credit and high DTISmaller down payments overallMore affordable with low credit Cons Mortgage insurance premiums required for life of loanProperty purchased must be your primary residence Pros and Cons of Conventional Loans Conventional loans can also offer flexibility, but generally only if you have good credit and demonstrate reduced risk to the lender. These loans have stricter qualifications, but flexibility in other areas. Pros Lowest option for down payments (3% with good credit)Private mortgage insurance can be canceled (must meet requirements)More affordable with good creditProperty purchased doesn’t have to be a primary residence Cons Strict qualifications require higher credit and lower DTILarger down payments are typicalPrivate mortgage insurance required with a down payment less than 20% Which Loan Is Better For You? Both FHA and conventional loans have their advantages and disadvantages. Here are some general guidelines for when to use an FHA loan or a conventional loan. When To Use an FHA Loan You have a low credit score (500–619)Your DTI ratio is on the higher side (between 45–50%)You can only afford a small down paymentYou plan to use the property as your primary residence When To Use a Conventional Loan Your credit score is fairly good (620 or above)Your DTI ratio is on the lower side (33–36%)You can afford a larger down paymentYou want flexibility with insurance and repaying your loan It’s important to thoroughly research your options before choosing a loan. A key takeaway when comparing FHA vs. conventional loans is that FHA loans are federally insured and conventional loans aren’t. This distinction results in different qualification and payment requirements for each loan. Use the information in this post to carefully compare the differences in accepted credit scores, minimum down payments, loan limits, maximum debt-to-income ratios, mortgage insurance and property standards. In doing so, choose the loan that works for your circumstances and helps you best afford the home of your dreams. Sources: FHA Single Family Housing Policy Handbook | US Dept. of Housing and Urban Development | Federal Housing Finance Agency | Freddie Mac Save more, spend smarter, and make your money go further Sign up for Free Previous Post Secured vs. Unsecured Loans: Here’s the Difference Next Post Home Construction Loans: How They Work Written by Mint Mint is passionate about helping you to achieve financial goals through education and with powerful tools, personalized insights, and much more. More from Mint Browse Related Articles Housing Finances FHA vs Conventional Loan: Which One is Right For You? Housing Finances What Is an FHA Loan? 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