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.

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.

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.

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

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.