FHA vs. Conventional home loans

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.

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.

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Product USFHL	Loan products offered	State availability	Min. credit score	‎
Rocket Mortgage	Conventional, Jumbo, FHA, VA, Refinance	Available in all states	620	See rates (888) 329-4989 Compare	Apply online for free and lock in your rate for 90 days.	loading Fetching your data...
Veterans United	Conventional, FHA, VA, USDA, Jumbo, Refinance	Available in all states	620	See rates More Info Compare	Veterans United stands out from other lenders for its focus on serving the military community.	loading Fetching your data...

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Written by

Peter Carleton

Writer

Peter Carleton is a freelance writer that covers banking and investing, breaking down what you need to know about where you put your money. When Peter's not thinking about cutting-edge banking apps and robo-advisors, he runs a creative agency and spends his spare time cooking or reading. See full bio

Co-written by

Kimberly Ellis

Writer

Kimberly Ellis is a personal finance writer at Finder, specializing in banking and financial literacy. After teaching in public and private schools, Kimberly zeroed in on personal financial education to help families and kids develop lifelong money skills. She hails from New York City, graduating summa cum laude from Queens College with a BA in elementary education and mathematics, as well as a New York State teaching certificate. She’s also an aspiring polyglot, always in a book and forever on the hunt for the perfect classic red lipstick. See full bio

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