Financing & Insuring

Deciding on a Conventional vs. FHA Home Loan

May 21, 2018

Federal Housing Administration (FHA) and conventional (or conforming) home loans have long been the most common mortgage options on the market. But which one is right for you? First, it’s important to clear up a major misconception that an FHA home loan is only for first-time homebuyers. While that’s a myth, it is true is that FHA loans have historically been more attractive to first-time homebuyers due to lower down payment requirements and interest rates. But as you’ll see, the differences between FHA and conventional loans aren’t as stark as they used to be. Nevertheless, nuance matters when dealing with large sums of money, so let’s review some key differences.

Credit score requirement

FHA
Conventional
FICO® score
as low as 500*
FICO® score
as low as 620*

There’s no question that FHA home loan requirements give buyers more credit wiggle room. This also makes it a clear-cut decision if you have a credit score below 620, as you likely won’t meet the threshold to qualify for a conventional home loan.

*Credit score requirements may differ depending on lender and amount of down payment

Down payment

FHA
Conventional
As low as 3.5%*
As low as 3%**

20% down used to be the classic standard for conventional loans. Not any longer. Today, qualified buyers are able to pay even less down on a conventional than they’d have to for an FHA loan, although there are still good reasons for paying 20% down if you have the funds.

*10% with a credit score below 580
**Certain restrictions may apply.

Gift funds

FHA
Conventional
All funds used for the down payment can be gifted*
All funds used for the down payment can be gifted**

Both loan types allow gift funds for the down payment (and even other expenses like closing costs), which is significant because gift funds are an important launching pad for many first-time homebuyers.

*FHA gift funds can come from family, friends and even business or government entities. Certain restrictions may apply.
**Gift funds must come from a relative, fiancé, fiancée or domestic partner. Certain restrictions may apply.

Interest rates

FHA loans generally offer lower interest rates than conventional loans. However, that difference could be marginal depending on market fluctuation.

Mortgage Insurance

FHA
Conventional
Required for the
life of the loan*
Generally only required
until you reach 20% equity

Conventional loans have a clear edge here. Mortgage insurance premiums (MIP) are designed to protect the lender if you default on your loan, so there’s no personal benefit to paying them longer than you have to. For each year that you’re required to pay premiums, they’ll cost between 0.5% to 1.0% of your total loan amount.

*Unless you put down 10% or more, in which case mortgage insurance premiums are only required for the first 11 years of the loan term

For more on finding the right mortgage for you, call 866.400.7126 to speak with one of our affiliate home loan officers at HomeAmerican Mortgage Corporation.

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