FHA vs. Conventional Loans: Pros, Cons, and Differences

Buying a new home is life’s happiest and a dream come true moment. Individuals with a healthy bank balance hardly break a sweat when making such an expensive purchase. But, when it comes to lower or middle-class people, it can be a cause of concern. However, in such a case, conventional loans vs FHA comes into play.

These home loans, often called mortgage or home financing, make it easy to buy a dream home. So, if you are a first-time home buyer and aren’t familiar with these terms, this guide is your go-to solution. We have compiled it to help you understand the differences between these loans and have an overview of their pros and cons as well.

Conventional Loans vs FHA Loans – An Overview

Starting with, we will first learn what both these loan terms mean. Below, we have outlined the definitions to make it easier for you to understand.

FHA Loan

Federal Housing Administration, famously known as FHA are those mortgages that are insured by the government itself. These loans were first introduced in 1934 and have insured tens of millions of properties since then. FHA loans are also helpful when you face a tight budget to afford a home or have a low-to-moderate income.

However, it is important to keep in mind that FHA loans are only insured on primary residential properties. Plus, there are certain guidelines and requirements that FHA loans cover, including credit issues, closing costs, mortgage insurance, debt-to-income ratio, and lending limits. However, FHA loans aren’t applicable to fixer-upper or second homes.

In order to get an FHA loan, your credit score must be at least 580. This will make you eligible for a down payment of 3.5% only. If your credit score falls in the range of 500-579, you can still get an FHA loan but with a down payment of 10% this time.

Conventional Loan

On the other hand, conventional loans are those that aren’t backed by either VA or FHA loans. However, getting a conventional loan isn’t that easy due to the strict guidelines. This is due to the fact that if you default by any chance, the lender won’t get the money from the government. So, in order to get a conventional loan, you must have a great credit score of 620 or more.

Along with this, private lenders even require the debt-to-income ratio to be 43% or less. These private mortgage lenders, however, include credit unions, online lenders, mortgage brokers, and even banks to some extent. Moreover, they might also have some other requirements, but it depends on the individual lending the loan.

Pros and Cons of Conventional Loan vs FHA Loan

Now, that you are familiar with the differences between conventional loan vs FHA, let’s head to learn about their pros and cons in detail.

Conventional Loans

First, we will look at the pros and cons of a conventional loan:

Pros

• Down payments for conventional loans can be as low as 3%.
• Get more affordable with the increase in credit score.
• You are not bound to buy only residential property.
• No need for MIP (mortgage insurance premium) if you make a down payment of 20% or greater.

Cons

• Strict regulations regarding the credit score and DTI (debt-to-income) ratio.
• Mortgage rates are higher than that of FHA loans.
• When making a down payment of less than 20%, MIP is a must.

FHA Loans

Now, we will shift our focus to FHA loans and see whether the pros overweight the cons or not:

Pros

• Borrowers are applicable for loans even with lower credit scores, such as 500.
• The loan is fully safe as it is insured by the Federal Housing Administration.
• With a healthy credit score of 580 or above, the down payment can be as low as 3.5%.
• Overall, the down payments are much smaller compared to other loans.

Cons

• Borrowers are only required to buy a residential home.
• The loan gets rejected if the home doesn’t meet health and safety standards.
• The mortgage insurance premium is a must, irrespective of the down payment percentage paid.

What are the Main Differences Between Conventional and FHA Loan?

If you are still unfamiliar with both these loans, and thinking about what to do, I have outlined a comparison chart for you below. This will help you learn about the differences between conventional loan vs FHA in a much better way.

Factors	FHA Loan	Conventional Loan
Minimum Down Payment	3.5%	3.0%
Minimum Credit Score	500 (with a higher down payment)	620
Best For	First-Time Buyers	Buyers with Good Credit Scores
Maximum DTI	57.0%	45.0%
Income Limit	None	None
Loan Limit (2024)	$498,257	$766,550
Refinancing Situation	The loan’s original paperwork is reused while streamlining refinancing to boost the process.	None Available
Mortgage Insurance Premium	Required at the upfront or must be paid in full over the life of the loan or at the loan closing time.	Required and paid monthly only if you have made a down payment of 20% or less. However, it is auto-terminated when the loan-to-value ratio reaches 78%

Final Words

When it comes to conventional loan vs FHA, both these can prove to be complex for you, especially if you are interacting for the first time. As discussed, buying a new home isn’t easy, and when you are low on finances, mortgage and home financing options like these are there to save your day.

Above, we have discussed their definitions, pros, cons, and even differences in detail. So, after going through this guide, analyze your credit score and DTI and select the best loan option for you accordingly.