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Comparing FHA loans to conventional mortgages Feature Image
Posted on 08/11/2020 7 minute read

Comparing FHA loans to conventional mortgages

As a first-time homebuyer, you’ve probably heard of an FHA loan, but this is just one of your first mortgage options. Another popular option is the conventional mortgage. These are two of the most common types of mortgages offered to first-time homebuyers. But, there are several differences.

Let’s compare and contrast an FHA loan to a conventional mortgage.

What is an FHA Loan?

An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA) and issued through an FHA approved mortgage lender. 

  • FHA loans provide options for borrowers with lower incomes and credit scores
  • FHA loans also allow borrowers to provide a lower minimum down payment
  • Homefinity, as an FHA approved lender, can help you qualify for an FHA loan
  • FHA loans do come with some restrictions and loan limits, which your loan officer can guide you through during your pre-approval process

Many of these features make an FHA loan attractive if you are just starting your financial journey or maybe rebuilding your financial situation.

What is a conventional mortgage?

In contrast to an FHA loan, a conventional mortgage or conventional loan is a mortgage that is available through mortgage companies, banks, and credit unions. 

Generally, they are not secured by a government entity, like an FHA loan. However, many conventional mortgages are guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), two government-sponsored enterprises.

  • Conventional mortgages are not offered or made through a government entity.
  • Conventional loans are instead available through private lenders and typically guaranteed by one of two government-sponsored enterprises—Fannie Mae and Freddie Mac.
  • Homefinity can help you complete a mortgage loan application, help you gather required documents, review your credit history, and assist you through the qualification process for a conventional mortgage.
  • Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans.

Conventional mortgage loans are often appealing to borrowers with higher incomes, more substantial cash reserves, and higher credit scores.

Side-by-side comparison of FHA vs. conventional loans

As you consider your mortgage options, comparing the requirements of an FHA loan versus a conventional loan can be helpful.

Minimum down payment

The difference in the minimum down payment requirements, between FHA and conventional mortgages, is not significant. Typically, an FHA loan requires a down payment of 3.5%, whereas a conventional loan may require between 3% and 5% depending on your personal credit profile and qualifying loan program. 

As with most lending, there are a variety of credit and qualifying requirements associated with these minimum down payments. This is why it is always wise to begin working with your loan officer early in your home buying process so they can help guide you in determining your best mortgage option.

Credit scores

An FHA loan tends to be a little more forgiving on the credit side, whereas a conventional mortgage loan typically requires qualifying credit scores above 620.

Keep in mind that mortgage loan qualification requirements are always changing. 

The best first step in thinking about buying or refinancing a home is to schedule an appointment with one of Homefinity’s professional loan officers. They can help you plan for that home purchase or guide you through refinancing into a better mortgage option.

Debt-to-income ratios

Your debt-to-income (DTI) ratio is another considered factor in qualifying you for an FHA or conventional mortgage loan. A debt-to-income ratio, your monthly debt and expenses divided by your monthly income, is a simple way for lenders to evaluate your ability to pay your monthly debts, like a car loan, student loans, personal loans, and minimum credit card payments as well as a future monthly mortgage payment.

The higher your debt-to-income ratio, the more difficult it may be for you to qualify for a new mortgage. In the case of an FHA loan, your loan will go by the results of your Automated Underwriting Findings. This could be 50% maximum DTI or higher, based on your compensating factors. You may also be eligible for a conventional mortgage at a DTI of 50%, but generally, the debt-to-income requirements are lower than FHA loans.

Mortgage insurance

Mortgage insurance is one of the main differences between FHA and conventional mortgages. Often misunderstood, mortgage insurance protects the lender in case you default on your loan. 

FHA loans require mortgage insurance regardless of your down payment amount for the life of the loan. In contrast, conventional loans require you to pay for mortgage insurance if your down payment is less than 20% or when your loan is paid down to less than 78% of your purchase price. 

Other key differences between FHA Mortgage Insurance Protection (MIP) and conventional Private Mortgage Insurance (PMI) include:

  • FHA mortgage insurance premiums cost the same regardless of your credit score
  • Conventional private mortgage insurance premiums may cost more or less depending on your credit score
  • FHA mortgage insurance premiums must be paid for the loan’s life if you make a down payment of less than 10%. However, you can refinance into a conventional loan to get rid of your FHA mortgage insurance in the future
  • Conventional private mortgage insurance is automatically removed once you have paid your mortgage down below 78% of the purchase price of your home
  • Both FHA and conventional private mortgage insurance costs may vary depending on the amount of your down payment

As you can see, mortgage insurance is one of the more confusing differences between FHA and conventional loans. Make sure to have your Homefinity loan officer guide you through this topic as you’re considering your various mortgage options.

Loan limits 

Both FHA and conventional mortgage loans have loan limits. These are the caps on the size of the loan that HUD (FHA) or FHFA (Fannie Mae or Freddie Mac) are willing to guarantee or buy.

  • FHA loan limits are set by HUD and can be referenced  on
  • Conventional conforming loan limits can be referenced on

Both FHA and conventional mortgage loan limits are set to reflect current housing prices and the mandates of the various guaranteeing agencies.

Property standards and types

The type of property that you are buying is also a factor in determining whether an FHA or conventional mortgage is best for your situation. 

  • FHA requires that the home you are buying is your primary residence
  • FHA also typically has more stringent appraisal requirements and standards for the condition of the house and property
  • Conventional mortgages can be used to buy a primary residence, vacation home, or investment property


Both FHA and conventional loans can be refinanced in the future. 

If mortgage rates drop and you want to refinance to take advantage of those lower rates, an FHA Streamline could be an excellent option. This unique FHA refinancing option can often be expedited without a new credit check, income verification, and often without an appraisal; however, there are a few restrictions as to who is eligible for a streamlined refinancing process.

One of the most common reasons to refinance an FHA loan is to remove mortgage insurance, which, if you put down less than 10%, is required for the life of the loan.

Next Steps in Considering Your Mortgage Options 

One of the incredible things about being a homebuyer in the US is that there are many options to finance your new home affordably. However, all of these choices can be overwhelming. Your Homefinity loan officer can be a valuable guide in finding the best mortgage option for your situation. 

Start your pre-approval process now, and we’ll connect you with one of our professional mortgage loan officers to guide you through the qualification process.

Important Resources & References

Homefinity is not affiliated with any government agencies. These materials are not from HUD or FHA, and were not approved by a government agency.

Additional information about FHA and conventional loans can be found on the following government websites:

Photo by todd kent on Unsplash

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