FHA vs Conventional Loan: Pros and Cons
FHA loans are good. Conventional loans are good. But one might suit you better than the other.
It’s a little like shopping for a car. A sports car and a minivan are both good vehicles. But one could be better for you depending on your life circumstances and goals.
Let’s see which loan might be better for you by looking at FHA vs conventional pros and cons.
FHA Loan Pros And Cons
The Federal Housing Administration, or FHA, insures lenders against borrower default. This allows lenders to offer low-cost loans to buyers with average to lower credit scores and incomes.
Many buyers can qualify for FHA when they don’t meet conventional lending criteria.
FHA Loan Pros
FHA Loan Cons
Interest rates and mortgage insurance are less expensive than conventional for most buyers
Mortgage insurance is usually permanent
Debt-to-income ratios up to 56%
Mortgage insurance required even with a 20%+ down payment
Credit scores down to 580
Upfront mortgage insurance fee of 1.75% of the loan amount
3.5% down payment
Home sellers may not accept an FHA offer
Gifts and down payment assistance allowed
More expensive than conventional for those with 5-10% down and excellent credit
No income limits, geographic restrictions, or first-time buyer requirement
Stricter property condition requirements than conventional
More About FHA
FHA was designed from the ground up as a loan choice for those who can’t qualify for a conventional loan. But they’ve evolved into more than that.
Many first-time buyers choose FHA because it’s cheaper monthly, even if they can qualify for a conventional loan.
For example, here’s the cost of mortgage insurance for both FHA and conventional (conventional rates provided by MGIC). FHA is typically less expensive except for those with very high credit scores.
Monthly Mortgage Insurance, $300,000 Loan
FHA 3.5% Down
Conventional 5% Down
FHA loan rates are often lower for most credit tiers as well.
If you qualify for both FHA and conventional, it’s worth having your lender run both scenarios to see which one is less expensive overall.
Conventional Loan Pros and Cons
Conventional loans are backed by the government like FHA loans are. So, lenders charge more for borrowers with lower credit scores and down payments.
So conventional loans are usually more costly than FHA for first-time buyers who have less than 5-10% down and a credit score below 740.
Conventional Loan Pros
Conventional Loan Cons
Low rates and mortgage insurance costs for those with 5-10% down and 740+ credit
Stricter debt-to-income ratio limits
No upfront mortgage insurance premium
Minimum credit score of 620; need 740+ for the best rates
No monthly mortgage insurance with 20%+ down payment
Must meet income limits or be a first-time buyer for 3% down programs
3% down minimum for first-time buyers
High rates and mortgage insurance costs for lower-credit buyers
Gifts and down payment assistance allowed
Harder to qualify for overall
Discounted rates and mortgage insurance for moderate-income buyers for some programs
Home sellers may accept a conventional offer over FHA
More About Conventional Loans
FHA loans aren’t always less expensive. Conventional loans have made great strides in recent years to better accommodate a wider range of buyers.
For example, borrowers who make 80% or less of their area median income get reduced rates and mortgage insurance for some programs.
It’s worth getting a conventional loan quote alongside an FHA quote to compare costs. You might be surprised that conventional is a better value despite having lower credit or income.
FHA vs Conventional Side-By-Side Comparison
580 (500 with 10% down)
Up to 56%
Much lower for credit scores <740
High for lower-credit borrowers
First-time buyers only?
Upfront mortgage insurance?
1.75% of loan
Monthly mortgage insurance
$46/month per $100k borrowed
$25-$200+/mo per $100k borrowed depending on credit & down payment
Is mortgage insurance cancelable without refinancing?
$472,030 in most areas
$726,200 in most areas
80% of area median for some 3% down programs
Slightly stricter than conventional
Looser than FHA
Allowed; 25% down for 3-4 units
Must live in the property
Investment properties allowed with 15% down
FHA vs Conventional Cost
The biggest “pro” of FHA loans is a potentially lower monthly cost, especially for those without perfect credit.
Here’s a scenario of a buyer with a 670 credit score who is approved for both FHA and conventional. If this were you, which option would you choose?
*All figures are estimates and will depend on your scenario. Not a quote or commitment to lend. Contact a lender for an accurate quote. Payment example based on $350k FHA loan at 6.6% rate and conventional loan at 7.016%, the average from Optimal Blue as of May 23, 2023. Standard FHA mortgage insurance of 0.55% per year. Conventional mortgage insurance estimate of 1.54% per year from MGIC based on 670 credit score with 3% down.
While the above is based on a 670 credit score, buyers with higher credit may save with FHA as well. Even someone with 720 credit may find rates and mortgage insurance more affordable choosing FHA.
Getting An Accurate FHA and Conventional Quote
The next step is to check your eligibility for an FHA and conventional loan. If you only qualify for FHA, your choice is easy.
If you qualify for both, have your lender run an analysis like the one above to determine your personalized cost estimate. From there, choose which loan type benefits you more.
Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, My Mortgage Insider, and more.