When it comes to mortgages, many homebuyers and homeowners are unsure about the differences between FHA vs Conventional loans. This is completely understandable, with the way mortgage rates have been it may seem impossible to get pre-approved for anything. Both of these loans have multiple and different advantages and disadvantages. Understanding them can help you decide when the perfect time to buy/refinance is and which one is best for you and your situation. In this guide, we’ll be taking a deep dive into the pros and cons of FHA and Conventional loans to help you make a more informed decision.
Introduction to FHA and Conventional Loans
FHA vs Conventional loans, the first thing to understand is the basics of each type of loan. FHA loans are backed by the Federal Housing Administration, while Conventional loans are not. FHA loans are considered government-backed loans, while Conventional loans are from entities outside of the governmental scope.
FHA loans are typically offered to those with lower credit scores, or those who may not have the funds for a large down payment. They are typically easier to qualify for than Conventional loans, but they also come with certain restrictions.
Conventional loans, on the other hand, are not backed by any government agency. They usually require a larger down payment, and they typically have stricter credit score requirements. Conventional loans are typically offered to those with higher credit scores, or those who have the funds for a larger down payment.
FHA Loan Advantages
When comparing FHA vs Conventional loans, it’s important to note that FHA loans come with a few key advantages. One of the biggest advantages of FHA loans is that they are easier to qualify for. Since FHA loans are backed by the government, they typically have less stringent credit score requirements than Conventional loans. Borrowers with lower credit scores usually find that FHA loans cost less per month than a conventional loan
Another advantage of FHA loans is that they typically have lower down payments than Conventional loans. This can make them more accessible to those who might not have the funds for a large down payment. FHA loans also come with certain benefits, such as the ability to roll closing costs into the loan, and the ability to refinance at a lower interest rate.
Conventional Loan Advantages
Conventional loans come with a few key advantages as well. One of the biggest advantages of Conventional loans is that they typically offer lower interest rates than FHA loans. This can save you money over the life of the loan, which can make them a great option for those looking to save money.
Another advantage of Conventional loans is that they often have fewer restrictions than FHA loans. This can make them a great option for those who are looking for more flexibility in their mortgage. Conventional loans also typically have fewer fees associated with them, which can also save you money.
Finally, Conventional loans often have higher loan limits than FHA loans. This can be beneficial for those looking to buy a larger home, or those who are looking for more financing options.
Comparing Loan Rates
With FHA vs Conventional loan rates, it’s important to keep in mind that FHA loans typically have lower interest rates than Conventional loans. This is because FHA loans are backed by the government, and the government often offers lower interest rates than the market.
However, it’s important to note that FHA loans also come with certain restrictions and fees that can add to the cost of the loan. It’s important to compare the total cost of the loan, including the interest rate, fees, and other costs (amortization), to make sure you’re getting the best deal.
Comparing Loan Requirements 
When looking at FHA vs Conventional loan requirements, you will find that FHA loans typically have less stringent credit requirements than Conventional loans. FHA loans often require a lower credit score, and they may also allow for higher debt-to-income ratios. The debt-to-income ratio must be 56.99% or less for an FHA loan while it is 45% or less for conventional loans.
It’s also good to know that FHA loans typically have lower down payment requirements than Conventional loans. FHA loans often require a down payment of at least 3.5%, while Conventional loans often require a down payment of at least 5%.
Comparing Loan funding fees
Comparing FHA vs Conventional loan funding fees, FHA loans typically come with a higher funding fee than Conventional loans. FHA loans often require a funding fee of 1.75%, while Conventional loans typically require a funding fee of 0.5%.
However, FHA loans also typically require a lower down payment than Conventional loans, which can offset the higher funding fee. Additionally, some FHA loans may be eligible for a funding fee waiver, which can make them even more affordable.
Comparing Loan Qualification
When going over both loan qualifications, typically FHA loans require a lower credit score than Conventional loans. FHA loans often require a credit score of 580 or higher, while Conventional loans typically require a credit score of 620 or higher.
Additionally, FHA loans often require a lower debt-to-income ratio than Conventional loans, 56.6% for FHA and 45% for conventional. This means that you may be able to qualify for an FHA loan with a higher debt-to-income ratio than you would for a Conventional loan.
Comparing Loan Limits
When comparing FHA vs Conventional loan limits, it’s important to note that FHA loans typically have lower loan limits than Conventional loans. FHA loans are typically capped at $331,760, while Conventional loans can go as high as $625,500 in some areas. FHA loan limit in Franklin County for 2023 will be $488,750 and conventional loan limit will be $726,200, loan amounts any higher become considered a “Jumbo” loan.
The loan limits for FHA loans can vary depending on the area, so it’s important to check with your lender to see what the loan limits for your area are.
Comparing Loan Credit Score Requirements
FHA loans typically require a lower credit score than Conventional loans. FHA loans often require a credit score of 580 or higher, while Conventional loans typically require a credit score of 620 or higher.
Additionally, FHA loans may be eligible for a credit score waiver, which can make them even more accessible to those with lower credit scores. Some lenders may be willing to work with you on an individual basis to determine if you are eligible for an FHA loan.
Comparing Loan Closing Costs
When comparing, FHA loans typically have lower closing costs than Conventional loans. FHA loans often have fees associated with them, including the upfront mortgage insurance premium and the annual mortgage insurance premium.
However, FHA loans also typically have lower down payment requirements than Conventional loans, which can offset the higher closing costs. Some FHA loans are eligible for closing cost assistance, which can make them even more affordable. FHA mortgage insurance is mandatory regardless of the down payment amount, it can’t be canceled unless you refinance into a conventional loan. For conventional loans a private mortgage insurance is required when the down payment is less than 20%, and it may be canceled after 20% equity has been hit.
Comparing Refinancing
Concerning refinancing, FHA loans can often be refinanced at a lower interest rate than Conventional loans. This can save you money over the life of the loan and can make a great option for those looking to save money.
However, again, FHA loans typically have higher closing costs than Conventional loans, so it’s important to compare the total cost of the loan to make sure you’re getting the best deal. Don’t forget that FHA loans are eligible for closing cost assistance, which can help offset the higher closing costs.
Conclusion
When it comes to mortgages, it can be difficult to determine which type of loan is the best for you. FHA and Conventional loans both have their advantages and disadvantages but understanding them can help you make an informed decision.
When comparing FHA vs Conventional loans, it’s important to consider the interest rate, fees, loan limits, credit score requirements, and other factors. Additionally, it’s important to weigh the advantages and disadvantages of each type of loan to determine which one is the best for you.
If neither of these sound like good options, give us a call today, with 50+ years of experience and our list of people we trust in the business we will help you find your perfect loan!
