When you wade into the homebuying pool, it can be tricky to decide which type of mortgage loan is best for you.
Two of the most popular loan options are conventional and FHA loans, and they both offer big advantages to homebuyers – depending on your finances.
While it’s easy to fall into black-and-white thinking – “conventional loans are good, FHA loans are bad” – think of it as the question: which one makes the most sense for you?
What’s the Difference Between FHA and Conventional Loans?
While it’s easy to fall into black-and-white thinking – our website “conventional loans are good, FHA loans are bad” – think of it as the question: which one makes the most sense for you?
FHA loans defined
FHA loans are government-backed loans insured by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). The FHA created this loan program to help those who didn’t meet traditional lending criteria become homeowners.
The government backing reduces the risk for lenders and encourages flexibility in approving borrowers with lower credit scores and down payments. That’s why it’s possible to qualify for an FHA loan with a 580 credit score and a 3.5% down payment.
The home must also be your primary residence. You cannot buy a vacation home or investment property with an FHA loan. However, you can buy a multifamily home with an FHA loan (up to four units), live in one unit, and rent out the others for income.
So that’s FHA. But what is a conventional home loan?
Conventional loans are the most common mortgages. They’re not insured by the government, but rather by the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. You may have heard the terms “conventional loans” and “conforming loans” used interchangeably, but there’s an important difference.
Conventional loans refer broadly to non-government-backed loans, and there are several different types of conventional loans. What most people probably mean when they refer to conventional loans is conforming loans.
A conforming loan meets Fannie Mae and Freddie Mac borrower guidelines and loan limits. Conforming loan limits are updated each year based on housing prices in a given area. A loan limit represents the maximum amount a lender can approve on a conforming loan. But we’ll explain more further down.
Generally speaking, you’ll need a credit score of at least 620 to qualify for a conventional loan and a debt-to-income ratio of 45% or less. Unlike FHA loans, conventional loans may be used for primary residences, vacation properties or second homes, and investment properties. That gives you more flexibility in how you use the home.
FHA loan vs. conventional loan eligibility
One way to figure out if an FHA or conventional loan is better for you is to compare the eligibility requirements.
It’s important to note, though, that these are just guidelines. Lenders often set their own standards, and some are able to offer more flexibility than others. The best way to find out what loan types you qualify for is to get preapproved. Then you’ll know which loan types are on the table for you and how much you can likely borrow.
The best way to find out what loan types you qualify for is to get preapproved. Then you’ll know which loan types are on the table for you and how much you can likely borrow.
FHA vs. Conventional Loan Cost
When considering conventional loans vs. FHA loans, you want to make sure you understand each loan’s requirements. Knowing how different factors affect your total loan costs can help clarify your choice.