Mortgage Blog

FHA or Conventional Home Loan?

Mortgage Basics

"Should I get an FHA or Conventional Loan?"

It is one of the most common questions we get as Loan Officers. Choosing between an FHA or Conventional Loan can seem daunting when you don’t know the benefits or differences between the two types of loan programs. Here’s a basic overview of what to expect when you choose your type of home loan.

Benefits of FHA Loans

FHA Loans are guaranteed by the Federal Housing Administration (FHA), which is why it’s called an FHA Loan. It’s typically easier for a borrower to qualify for an FHA Loan, particularly first time homebuyers. You may be able to qualify for an FHA Loan with questionable credit. More people are able to get a loan through this type of program because lending requirements are typically less rigid on an FHA Loan than Conventional Loans.

A homebuyer’s debt-to-income ratio can be much higher on an FHA Loan than a Conventional Loan, which helps young adults early on in their career qualify for a mortgage. FHA Loans also often have lower interest rates than most Conventional Loans, but the rate spread will vary state by state.

Drawbacks to FHA Loans

Since these loans are backed by the government, you will have to follow their specific rules and regulations. You could also face prepayment penalties and other issues that you wouldn’t face when financing your home with a Conventional Loan.

Benefits of Conventional Loans

The biggest advantage of Conventional Loans is that they typically do not have the same amount of rules and regulations that FHA Loans do. Between prepayment penalties and other unforeseen costs, you could end up paying more with an FHA Loan.

Both FHA and Conventional Loans have low down payment requirements. Many first time buyers were drawn towards FHA Loans due to their 3.5% down payment requirement, but now the Conventional Loan offers 97% LTV financing options which will allow borrowers to put as little as 3% down.

If you put less than 20% down on your mortgage, you will have to pay mortgage insurance (MI) regardless of the loan program. The MI protects the lender against financial loss, should you default on your loan. Paying for MI on your FHA Loan could wipe out the advantage you would have from the lower interest rate that comes with an FHA mortgage.

Drawbacks of Conventional Loans

The main difference is that it is more difficult to qualify for a Conventional Loan. They typically require better credit and financial standing than an FHA Loan.

When you’re discussing your options with your Loan Officer, and find yourself choosing between an FHA Loan and a Conventional Loan, we always recommend listing out the details of the two different loan programs, along with each of their advantages and disadvantages. We hope this basic list of differences can help you with your choice. Don’t be afraid to ask your Loan Officer to go into greater detail so you can make an informed mortgage decision!