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FHA vs. Conventional Loans: Which is Better?

Key Learnings
  • FHA and conventional loans both have low down payment requirements
  • FHA loans might be better for borrowers with lower credit scores
  • If you're looking to buy a secondary home or investment property conventional loans are the way to go
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When you’re ready to purchase a home, it’s easy to get stuck when it comes to deciding the right mortgage for your needs. With so many options out there, it’s hard to tell which is the best one for you.

FHA loans offer lenient eligibility criteria and smaller down payment requirements. Conventional loans, on the other hand, are more widely used and accessible to a wider range of people.

But which is better: FHA vs conventional loans? We’ll break it down below.

Conventional Loans Overview

Unlike FHA loans, conventional loans are not insured or backed by any government agency. This means that their eligibility criteria can be stricter. That criteria might include a higher credit score or down payment requirement.

Conventional loans are offered by most lenders and are suitable for a wide range of homebuyers.

Differences Between FHA and Conventional Loans

Both FHA and conventional loans are popular mortgage types and solid options for first-time homebuyers. However, there are some key differences to be aware of before you choose one or the other.

Down Payment for FHA vs. Conventional

The down payment is one of the biggest hurdles that first-time homebuyers have to overcome. For FHA loans, down payments can be as low as 3.5%, making it an attractive option for those with smaller savings.

While the traditional down payment for conventional loans is 20%, you can still qualify for a conventional loan with as little as 3%. This will depend on your circumstances, however, and it’s important to keep in mind you will need to pay private mortgage insurance (PMI) for anything below 20%.

Credit Score for FHA vs. Conventional

As FHA loans are backed by the government, lenders can set lower credit benchmarks. The acceptable credit score is typically 580, but that number can differ between lenders.

Buyers with a credit score below 580 can still qualify for an FHA loan, but they will usually be expected to come up with a down payment of at least 10%.

Conventional loans typically require a credit score of 620 or higher. However, that score may be higher or lower, depending on the lender.

Paddio’s current credit score requirement for conventional and FHA loans is 620.

Interest Rates for FHA vs. Conventional

FHA loans typically have lower interest rates than conventional loans, which is another plus for this mortgage type. However, interest rates depend on your own unique financial history, regardless of the loan type. The best thing you can do is to get in touch with a specialist at Paddio who can help you learn more about your personal interest rate quotes when applying for a loan.

Debt-to-Income Ratio for FHA vs. Conventional

A debt-to-income ratio (DTI) is the level of debt you have compared to your take-home income. Lenders want to see a relatively low DTI to ensure you will be able to manage your monthly mortgage payments without issue. Those with a higher DTI might raise red flags for lenders.

For FHA loans, lenders want to see a debt-to-income ratio of 50% or less to qualify. Conventional loans allow DTIs up to 50% in some cases, however, it should ideally be no more than 43%.

Loan Limits for FHA vs. Conventional

Both FHA and conventional loans have limits on the amount you can borrow. This limit varies depending on the area you’re buying in.

In 2023, the FHA loan limit is $472,030 in low-cost areas and $1,089,300 in more expensive areas.

Conventional loan limits are set by the Federal Housing Finance Agency. The 2023 limit is set at $726,200 for the majority of mortgages. If you need a mortgage greater than that, consider applying for a jumbo loan.

Mortgage Insurance for FHA vs. Conventional

Mortgage insurance acts as a safety net for lenders to protect them from borrowers who may be at higher risk of defaulting. If you have a low down payment, mortgage insurance is usually required.

For conventional mortgages, you will have to pay mortgage insurance if you put down less than 20%. However, once you build up at least 20% equity in your home, that insurance is no longer required.

For FHA loans, you will also have to pay mortgage insurance for lower down payments. The difference is that an FHA loan with less than 10% down means the mortgage insurance is payable throughout the entirety of your loan—even if you reach 20% equity. If you put 10% down or more, you can remove the mortgage insurance after 11 years of payments.

Otherwise, to remove a PMI from your FHA loan, you would need to refinance to a conventional loan down the line.

Which is Better for Me? FHA or Conventional?

There are many factors to consider when looking at the advantages of a conventional loan vs FHA, and either could be a great choice for you. The most important thing to do is to take your own personal circumstances into account to help you determine the best option.

Which Type of Loan is Best for My Needs?

FHA Loans Conventional Loans
Small Down Payment Good Good
Low Credit Score Good Bad
Low-Interest Rate Good Bad
High Debt-to-Income Ratio Good Bad
Avoid PMI Bad Good
I plan to use the property as a secondary residence, vacation home, or investment property Bad Good
Large loan amount Bad Good

Get in touch with a Paddio specialist today to learn more and to find trained staff and helpful advice.

Pros and Cons of FHA Loans

Here are the benefits of an FHA loan:

  • Low down payment of 3.5%

  • Lower credit score requirements

  • No income limits, which is ideal for both low- or high-income borrowers

  • Multiple housing options, meaning the loan can be used to buy single-family homes, condos, manufactured homes or multifamily homes

FHA loan downsides include the following:

  • Loan limits; you can only borrow up to $420,680 in a low-cost area or $970,800 in a high-cost area

  • Higher mortgage insurance payments; while less expensive, PMI is payable for the entire loan term if you put down less than 10%.

  • Strict property standards in that properties must be appraised for safety and soundness, which can cause delays

  • Use for primary residence only; FHA loans can't be used for investment properties or second homes

Pros and Cons of Conventional Loans

Conventional loans can provide many benefits, such as those listed below:

  • Broad usage; in addition to primary residences, conventional loans can be used for vacation homes, investment properties or second homes

  • Mortgage insurance isn’t always required; if you put 20% down or build up to 20% equity in your home, you can get rid of mortgage insurance

  • Higher loan limits, allowing you to borrow more to purchase a home

  • No income limits, meaning that whether you're a high- or low-income earner, you could qualify for this loan

There are also some challenges with conventional mortgages, which include the following:

  • Higher required credit score; most lenders want a score of at least 620 score

  • A lower debt-to-income ratio, with lenders generally wanting a DTI of 43%

  • Stricter lending criteria due to higher credit scores and lower DTIs, meaning it can be harder to get approved

  • The loans can come with higher interest rates than FHA loans

At the end of the day, both FHA and conventional home loans can be great options for first-time and repeat homebuyers. If you are still feeling unsure about which mortgage option is best for you, get in touch with one of our home loan specialists today.

Written by:
Crystal Shifflett
Loan Coordinator

Crystal’s experience spans many aspects of the homebuying process, including closing and title work, but perhaps her own personal experience of purchasing several homes across state lines helps her connect with and advocate for homebuyers.

More articles by Crystal Shifflett
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