FHA vs. Conventional Loans: Which Is Right for You?

Two of the most common loan types for homebuyers are FHA and conventional loans. Understanding the differences helps you choose the right one for your situation.

Quick Comparison

Feature	FHA	Conventional
Down payment	3.5% minimum	3% minimum (some programs)
Credit score	580+ for 3.5% down	Usually 620+
Mortgage insurance	Required for life of loan	Removable at 20% equity
Property standards	Stricter requirements	More flexible
Loan limits	Varies by county	Higher limits available

FHA Loans

FHA loans are insured by the Federal Housing Administration, making them less risky for lenders.

Advantages

Lower credit requirements:

• 580+ credit score for 3.5% down
• 500-579 may qualify with 10% down
• More forgiving of past credit issues

Lower down payment:

• 3.5% down is the standard
• Down payment can be gifted entirely

Easier qualification:

• More flexible debt-to-income ratios
• Accommodates non-traditional credit history

Disadvantages

Mortgage insurance premium (MIP):

• Upfront MIP: 1.75% of loan amount (usually financed)
• Annual MIP: 0.55% for most loans
• Cannot be removed for the life of the loan (if down payment < 10%)

Property requirements:

• Must meet FHA minimum property standards
• Safety, security, and soundness requirements
• May not work for fixer-uppers

Loan limits:

• Lower maximum loan amounts
• Limits vary by county

Conventional Loans

Conventional loans aren't government-backed. They follow guidelines set by Fannie Mae and Freddie Mac.

Advantages

No permanent mortgage insurance:

• PMI required below 20% down
• Automatically terminates at 78% LTV
• Can request removal at 80% LTV

More property flexibility:

• Less strict property requirements
• Works for more property types
• Better for properties needing work

Higher loan amounts:

• Conforming limits higher than FHA
• Jumbo loans available for expensive properties

Disadvantages

Higher credit requirements:

• Typically need 620+ credit score
• Best rates require 740+

May be harder to qualify:

• Stricter debt-to-income requirements
• Less flexibility on credit history

Which Should You Choose?

FHA Might Be Better If:

• Your credit score is below 680
• You have limited savings for down payment
• You've had recent credit challenges
• You're a first-time buyer with thin credit history

Conventional Might Be Better If:

• Your credit score is 700+
• You can put 10%+ down
• You want to avoid permanent mortgage insurance
• The property might not meet FHA standards

The Real Cost Comparison

Don't just look at monthly payments—consider total costs:

Example: $300,000 Home

FHA (3.5% down = $10,500):

• Loan: $289,500 + $5,066 upfront MIP = $294,566
• Monthly MIP: ~$135/month for life of loan

Conventional (5% down = $15,000):

• Loan: $285,000
• PMI: ~$150/month until 78% LTV (~10 years)

Over time, the conventional loan often costs less due to removable PMI, despite similar or higher initial monthly payments.

The Refinance Strategy

Some buyers:

1. Start with FHA (easier qualification)
2. Build equity and improve credit
3. Refinance to conventional to eliminate MIP

This works but involves refinance costs. Run the numbers for your situation.

Getting Accurate Comparisons

Ask your lender to show you:

• Side-by-side payment comparisons
• Total cost over 5, 10, and 30 years
• Break-even points for different scenarios

The "best" loan depends on your specific circumstances, not general rules.

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Want help comparing loan options? Contact Greg Franklin or call (559) 816-7780 for lender recommendations.