FHA vs Conventional Mortgages: Which is the Right Choice for You?

When it comes to buying a home, applying for a mortgage is often the first step. But with so many different types of mortgages available, it can be difficult to know which one is right for you. Two common types of mortgages are FHA and conventional. In this article, we’ll explore the differences between FHA and conventional mortgages, so you can make an informed decision when buying your next home.

Trending

Assessed Value vs Market Value: What’s the Difference

Table of Contents

1. What are FHA and conventional mortgages?
2. The differences between FHA and conventional mortgages
   • Down payment requirements
   • Credit score requirements
   • Mortgage insurance
   • Loan limits
   • Property requirements
3. Pros and cons of FHA and conventional mortgages
   • FHA mortgage pros and cons
   • Conventional mortgage pros and cons
4. How to decide between an FHA and conventional mortgage
5. Frequently asked questions about FHA and conventional mortgages

What are FHA and Conventional Mortgages?

FHA (Federal Housing Administration) and conventional mortgages are two types of home loans that are used to purchase or refinance a property. Both types of mortgages require you to make monthly payments on your loan, but there are some key differences between the two.

An FHA loan is insured by the Federal Housing Administration, which means that if you default on the loan, the FHA will pay the lender back. FHA loans are typically designed for borrowers who have lower credit scores or who don’t have a lot of money for a down payment.

A conventional loan is not insured by the government. Instead, it is backed by private lenders. Conventional loans are typically designed for borrowers who have good credit scores and who can afford to make a larger down payment.

The differences between FHA and Conventional mortgages

There are several differences between FHA and conventional mortgages. Let’s take a look at the most important ones:

Down payment requirements

One of the biggest differences between FHA and conventional mortgages is the down payment requirement. With an FHA loan, you can typically make a down payment as low as 3.5% of the purchase price of the home. With a conventional loan, you may need to make a down payment of 5% to 20% or more, depending on your credit score and other factors.

Credit score requirements

Another important difference between FHA and conventional mortgages is the credit score requirement. FHA loans are designed to be more accessible to borrowers with lower credit scores. You can typically qualify for an FHA loan with a credit score as low as 500, although you’ll need to make a larger down payment if your score is below 580. Conventional loans generally require a minimum credit score of 620 or higher.

Mortgage Insurance

Mortgage insurance is another factor to consider when comparing FHA and conventional mortgages. With an FHA loan, you’ll be required to pay for mortgage insurance, which protects the lender in case you default on the loan. There are two types of mortgage insurance with an FHA loan: an upfront premium, which is usually rolled into your loan amount, and an annual premium, which is paid in monthly installments.

Conventional loans also require mortgage insurance if you make a down payment of less than 20%. However, you may be able to avoid mortgage insurance if you make a larger down payment or if you have a good credit score.

Loan Limits

Loan limits are another important consideration when comparing FHA and conventional mortgages. FHA loans have specific loan limits that vary depending on where you live and the type of property you’re purchasing. In 2021, the FHA loan limit for a single-family home is $472,030 in most parts of the country.

Conventional loans do not have specific loan limits, but they do have what are called conforming loan limits.

Conforming loan limits are the maximum loan amount that lenders can sell to Fannie Mae or Freddie Mac, which are government-sponsored enterprises that buy and sell mortgages on the secondary market. In 2023, the conforming loan limit for a single-family home is $726,200 in most parts of the country.

Property Requirements

FHA and conventional loans also have different property requirements. FHA loans have specific guidelines for the condition of the property you’re purchasing, which must meet certain health and safety standards. Conventional loans generally do not have specific property requirements, although the lender may require an appraisal to ensure that the property is worth the amount of the loan.

Pros and cons of FHA and Conventional Mortgages

Both FHA and conventional mortgages have their pros and cons. Let’s take a closer look:

FHA mortgage pros and cons

Pros:

• Lower credit score requirements: You may be able to qualify for an FHA loan with a lower credit score than you would need for a conventional loan.
• Lower down payment requirements: You can make a down payment as low as 3.5% of the purchase price of the home.
• Easier to qualify: FHA loans are generally easier to qualify for than conventional loans.

Cons:

• Mortgage insurance: You’ll be required to pay for mortgage insurance with an FHA loan, which can add to the cost of your monthly payments.
• Loan limits: FHA loans have specific loan limits, which may limit the amount of money you can borrow.

Conventional Mortgage pros and cons

Pros:

• No mortgage insurance: If you make a down payment of 20% or more, you may be able to avoid mortgage insurance with a conventional loan.
• Flexible loan amounts: Conventional loans do not have specific loan limits, so you may be able to borrow more money than you would with an FHA loan.
• Lower overall cost: If you have a good credit score and can afford to make a larger down payment, a conventional loan may have a lower overall cost than an FHA loan.

Cons:

• Higher credit score requirements: You’ll generally need a higher credit score to qualify for a conventional loan than you would for an FHA loan.
• Higher down payment requirements: You may need to make a larger down payment with a conventional loan than you would with an FHA loan.

How to decide between an FHA and Conventional Mortgage

So, which type of mortgage is right for you? Here are some factors to consider:

• Your credit score: If you have a lower credit score, an FHA loan may be a better option.
• Your down payment: If you don’t have a lot of money for a down payment, an FHA loan may be a better option.
• Your loan amount: If you need to borrow more than the FHA loan limit for your area, a conventional loan may be a better option.
• Your monthly payments: Consider the overall cost of the loan, including mortgage insurance, when comparing FHA and conventional loans.

Ultimately, the right choice for you will depend on your individual financial situation and goals.

Conclusion

When it comes to buying a home, choosing the right type of mortgage is an important decision. Both FHA and conventional mortgages have their pros and cons, so it’s important to weigh the factors that are most important to you. By understanding the differences and considering your individual financial situation, you can make an informed decision about which type of mortgage is right for you. Remember to compare the down payment requirements, credit score requirements, mortgage insurance costs, loan limits, and property requirements for both FHA and conventional loans before making your decision. With careful consideration, you can find the mortgage that fits your needs and budget, and achieve your dream of homeownership.

Frequently asked questions about FHA and conventional mortgages

1. What is the difference between an FHA loan and a conventional loan?
2. How much do I need to put down for an FHA loan?
3. How much do I need to put down for a conventional loan?
4. Do I have to pay mortgage insurance with a conventional loan?
5. Can I switch from an FHA loan to a conventional loan?