FHA Loans VS. Conventional Loans: What’s the Difference?

By Right Start Mortgage
January 18, 2023

If you’re a first-time homebuyer in the early stages of financing the purchase of a property, you need to know your options. While there are many types of loans, conventional and FHA loans are two of the most common. But what’s the difference between the two, and which is right for you? We’ll tell you everything you need to know.

The Short Answer: What’s the Difference Between FHA and Conventional Loans?

FHA loans are backed by the federal government and insured by the Federal Housing Administration. Because of this, FHA loans have less stringent qualification criteria, making it easier for those with less down payment capital and lower credit scores to qualify.

Conventional loans are backed by private lenders who require higher credit scores, traditional down payment amounts, and lower debt-to-income ratios.

The Longer Answer: Comparing FHA and Conventional Loans

Here, we drill down to how these two types of loans compare to each other.

Down Payments and Credit Scores

Both conventional and FHA loans require homebuyers to produce a down payment, but the total amount varies. The credit score criteria varies as well.

FHA: To qualify for an FHA loan, homebuyers must be able to produce a down payment totaling 3.5 percent of the loan amount. Candidates must also have a credit score of 580 or higher. If your credit score is lower than 580, you may still qualify by making a 10 percent down payment.

Conventional: Conventional lender requirements vary, but generally, they require candidates to produce a 10 to 20 percent down payment and have credit scores of 620 or higher.

Debt-to-Income Ratio (DTI)

Simply put, DTI compares the amount of money you owe every month to how much you make. DTI considers outstanding debts like credit cards, rent, mortgages, and student loans.

FHA: Typically, to qualify for an FHA loan, your DTI must not exceed 43 percent. This may vary on a case-by-case basis.

Conventional: Conventional lenders generally require a DTI of no more than 45 percent. However, that requirement can vary based on the lender.

Mortgage Insurance

When lenders give you a loan, they are taking a calculated risk. While your credit score, DTI, and down payment offer some reassurance that you’ll fulfill your repayment obligations, lenders need more security. Hence, you must carry mortgage insurance.

FHA: If you qualify for an FHA loan, you must carry mortgage insurance. The good news is that your mortgage rate will not fluctuate throughout the lifespan of your loan. As we’ll explain, this is not the case with conventional loans.

Conventional: If your down payment is less than 20 percent, conventional lenders will require you to have mortgage insurance. Your rate may fluctuate depending on your credit score and down payment amount.

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