FHA vs. Conventional Loans

Although FHA loans offer some attractive advantages making it easier for some to qualify for a mortgage, it’s also important to know how they can significantly minimize your strength in a strong sellers' market.  FHA borrowers who know what to expect can restrict their search to properties that are likely to meet FHA guidelines.  The following facts compare the basics of FHA and Conventional loan differences and highlight some disadvantages when considering your loan options.

FHA

• Lower credit score requirement (479-500)

• Lower down payment (3.5% for credit score of 580+, otherwise 10% down for credit score under 580)

• More lenient on debt-to-income ratio (percentage of your monthly income minus monthly obligations)

• Must be owner occupied

• Must purchase mortgage insurance

• Takes longer to process FHA loans generally

• FHA assigned appraiser has more requirements for property to meet minimum standards (protecting the lender) in order for home to close

Conventional

• Conventional Loan requires 620+ credit score for 5%-20% down

• Minimum down payment 5%  

• FHA loans are cheaper in the beginning, but over the life of the loan conventional loans are the cheapest option.

• Does not have to be owner occupied

• No mortgage insurance required if 20% or more down or one loan is paid down to 78% loan-to-value

• Private Mortgage Insurance is less expensive than FHA

• More flexible guidelines on home’s condition in order to get loan approved, which is more competitive in a strong sellers' market