Comparing FHA Loans and Conventional Loans


Most people assume FHA loans are means for first-time homebuyers, while conventional mortgages should only be taken by established buyers. But, this is not necessarily true. FHA loans are backed by the Federal Housing administration, unlike conventional loans. Both types of mortgages offer benefits for borrowers, but their qualification requirements differ significantly.

How to Compare Conventional and FHA Loans

Minimum Down Payment: FHA loans require a minimum down payment of at least 3.5% – to be eligible for this, borrowers are required to have a minimum credit score of at least 580. If your credit score is between 500 and 579, you may have to make a 10% down payment instead. Conventional loans typically require a much higher down payment – usually about 20%. Some loans may allow a 3% down payment, but this is reserved for people with ample savings and high credit scores.

Credit Scores: FHA loans are slightly easier to qualify for in terms of credit score. People who have credit scores as low as 500 can apply for FHA loans but may have to pay a higher interest rate. Conventional loans require a minimum score of 620 or higher. The lower your credit score, the higher you can expect to pay for a conventional loan.

Debt-To-Income Ratio: Your debt-to-income ratio is the percentage of your income (pre-tax) that you use to repay your debts. The higher this ratio is, the more likely you are to have trouble repaying your debts. FHA loans require prospective borrowers to have a debt-to-income ratio of 50% or less to qualify, while conventional loans will allow a debt-to-income ratio of up to 50%.

Mortgage Insurance: If you make a down payment of under 20% on a conventional loan, you will need to get mortgage insurance. For FHA loans, borrowers are required to have mortgage insurance regardless of how much they pay on the loan.

Loan Limits: Both FHA and conventional loans have limits on how much you can borrow, and the maximum loan sizes typically vary by county. The 2021 FHA loan limit in low-cost areas is $356,362 and $822,375 in more expensive markets. For conventional loans, the limit is $548,250 this year. A loan that exceeds this limit will be classified as a jumbo loan.

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