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FHA vs. Conventional home loans

Government-backed loans have more flexible guidelines but can be more expensive.

Most people see FHA and think loans backed by the agency are for first-time homebuyers only, but that isn’t the case. FHA loans can help any homebuyers who don’t have a high enough credit score or a large enough down payment to purchase a home with a conventional mortgage.

But FHA-backed loans also come with permanent mortgage insurance premiums throughout the life of the loan — a premium that drops off from a conventional loan after you’ve attained 22% equity. Understanding this and other differences can help you determine which mortgage loan makes the most sense for you.

Choose an FHA loan if…

  • Your FICO score is less than stellar.
  • You’re planning to live in the house as your primary residence.
  • You need help coming up with a down payment.

Choose a conventional loan if…

  • You have a solid credit history.
  • You don’t need down payment assistance.
  • You’re buying a home or investment property that may not meet FHA guidelines.

FHA vs. conventional loans side-by-side

While both mortgage types are available through banks, credit unions and private mortgage lenders, we’ve broken down the differences below to help you sort through which is right for you. Select the topic links in the table for more information.

Conventional loanFHA loan
Credit score requirements620+500+
Maximum loan amounts$548,250 in most areas
$822,375 in high cost areas
$356,362 in low cost areas
$822,375 in high cost areas
Mortgage insurancePrivate mortgage insurance (PMI) on down payments less than 20%Mortgage insurance premiums (MIP) required, regardless of down payment
Down paymentStarts at 3%Starts at 3.5% with 580+ FICO score
Starts at 10% with 500-579 FICO score
FeesStandard lending feesStandard fees and FHA funding fees
DTI ratioUp to 43%Up to 43%
Restricted uses
  • No down payment assistance programs
  • Can’t be transferred to another buyer
  • Only a portion of down payment can be a gift
  • Must be owner-occupied primary residence
  • Condos must be FHA-approved
For more information:Our guide to Conventional loansOur guide to FHA loans

Mortgage insurance

Most lenders require private mortgage insurance (PMI) on conventional mortgages with less than 20% down. Once you build at least 22% equity in your home or reach the halfway point in your loan term — such as 15 years on a 30-year term — you can cancel your PMI.

FHA loans come with mortgage insurance premiums (MIP), regardless of your down payment amount. While FHA mortgages issued before 2013 may allow you to cancel your MIP under specific circumstances, mortgages originated on or after June 3, 2013, will generally include MIP for the life of the loan. This means that you can’t cancel your mortgage insurance until the loan is paid back in full.

Fees

Conventional and FHA loans both come with the standard fees associated with getting a mortgage, including origination and appraisal charges. But FHA loans come with additional fees unique to its loan type.

For example, you’ll need to pay the FHA funding fees, which include the up-front mortgage insurance (UFMI) and first month’s mortgage insurance premium (MIP) and costs 2.25% of the loan amount. The funding fee can be financed by rolling the amount into the mortgage loan.

DTI ratio

Lenders like to see a debt-to-income (DTI) ratio of no more than 43%. But for FHA, the ratio for your mortgage and related expenses can’t exceed 31%, regardless of your other debt. Some may allow a higher DTI if you show some compensating factors, like a high credit score or generous cash reserves.

In December of 2020, the Consumer Financial Protection Bureau issued new guidelines for qualifying mortgages that allow lenders to be more flexible in how they consider DTI against other factors when determining a borrower’s eligibility for a loan.

Restricted uses

Conventional loans are for qualified buyers who have some savings to put toward a down payment. You can’t use any down payment assistance programs, and only a portion of your down payment can be a gift. You also can’t transfer your loan to another buyer.

FHA allows gifts to be used for your full down payment, but you must live in the home you buy with an FHA loan as your primary residence. And all condos must meet specific guidelines, such as a high percentage of owner-occupied apartments, to receive FHA approval.

Alternatives to FHA and conventional loans

If you have a low credit score and little to no down payment money saved up, you may think an FHA is your only option. But you have alternatives.

Veterans, active-duty military members and their families can apply for VA loans, which require no down payment and often have more competitive interest rates.

Some lenders, like New American Funding, also offer nonqualifying loans for buyers who don’t have the paperwork required to qualify for an FHA or conventional loan, and interest-only loans for buyers who need a lower mortgage payment now but will be able to afford a higher payment in the future.

And lenders like Homebridge Financial offer financing designed for low-income borrowers that you might qualify for, even if you can’t secure a government-backed loan.

Compare FHA and conventional mortgage lenders

Comparison shopping is the best way to understand your options and pick the one that best suits your mortgage needs. Select See rates to provide the company with basic property and financial details for personalized rates.

1 - 5 of 5
Name Product Loan products offered State availability Min. credit score
Rocket Mortgage
(NMLS #3030)
Rocket Mortgage
Conventional, Jumbo, FHA, VA, Refinance
Available in all states
620
Streamline your mortgage from quote to final payment — all from your computer or phone.
Morty
(NMLS #1429243)
Morty
Conventional, Jumbo
Not available in: AZ, HI, MA, MO, NV, UT
620
Preapproval in minutes and closing in as little as 3 weeks with no origination fees.
LendingTree
(NMLS #1136)
LendingTree
HELOC, Home Equity loans
Available in all states
620
Connect with vetted lenders quickly through this free online marketplace.
Veterans United
(NMLS #1907)
Veterans United
Conventional, FHA, VA, USDA, Jumbo, Refinance
Available in all states
620
Veterans United stands out from other lenders for its focus on serving the military community.
Freedom Mortgage
(NMLS #2767)
Freedom Mortgage
Conventional, Jumbo, FHA, VA, USDA, Refinance
Available in all states
620
A lender that excels in FHA and VA loans, offering low down payment options to borrowers.
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