Conventional vs FHA

Introduction

The main difference between a conventional mortgage and an FHA (Federal Housing Administration) mortgage is the entity that backs the loan. A conventional mortgage is not insured or guaranteed by the federal government, whereas an FHA mortgage is insured by the government through the Department of Housing and Urban Development (HUD). These different entities have different underwriting requirements and pricing structures.

See more on FHA or Conventional Loans

Differences

Here are some key differences in the qualifications between conventional and FHA mortgages:

1. Down payment: Conventional mortgages typically require a larger down payment, ranging from 3% for first time home buyers and lower income families to 20% of the home’s purchase price. FHA mortgages require a minimum down payment of 3.5%.
2. Seller Concessions: This is when the seller assists with the closing costs when buying a home. FHA allows up to 6% while Conventional is limited to 3% in concessions when you are putting less than 10% down, 6% over 10% down and 9% when the down payment is over 25%. For someone putting minimum down, FHA will usually be the lower out of pocket option.
3. Credit score: Conventional mortgages typically have higher credit score requirements, with most lenders requiring a credit score of at least 620 while 680+ is preferred. FHA mortgages may be available to borrowers with lower credit scores aka under 680, with a minimum requirement of 500, though borrowers with scores between 500 and 579 will need to put down 10%.
4. Mortgage insurance: Conventional mortgages may require private mortgage insurance (PMI) if the down payment is less than 20% of the home’s purchase price. FHA mortgages require mortgage insurance premiums (MIP) for the life of the loan. The insurance on an FHA loan will typically be higher. Example: 300k loan FHA mortgage insurance would be 137.5/mo while conventional mortgage insurance with good credit around 80/mo.
5. Loan limits: Conventional mortgages may have higher loan limits than FHA mortgages, depending on the location of the property.
6. Qualification requirements: Conventional mortgages may have stricter qualification requirements, including debt-to-income ratio, employment history, and income verification.

Conclusion

As for which one is better, it depends on your individual financial situation and goals. A conventional mortgage may be a good option if you have a higher credit score or a larger down payment, while an FHA mortgage may be a better fit if you have a lower credit score and a smaller down payment. It’s important to speak with a mortgage professional to determine which option is right for you.