Choosing the type of loan that makes the most financial sense for you can be daunting for first time homebuyers and repeat purchasers alike.
There’s some really important advantages to FHA Loans that might help you get into home ownership, but there are strings attached that could make it harder to win an offer. Here is an introduction to these two mortgage types and their advantages and disadvantages.
What are FHA loans?
A FHA loan is a mortgage loan that is insured by the Federal Housing Administration. Its purpose is to give more Americans access to homeownership by having lower down payment and credit requirements than a conventional loan, as well as allowing for a higher debt-to-income ratio.
They are ideal for homebuyers who want to start building wealth and security through home ownership, and would need to save for a long to infinite period of time to qualify for a conventional loan.
What are Conventional Loans?
Conventional Loans are backed by private mortgage lenders, with higher barriers to qualify such as credit score and down payment. Conventional loans have much fewer restrictions when it comes to the loan amount, type of property to be purchased and intended use of the property. They are ideal for borrowers with good credit who can afford a larger down payment and want to avoid the restrictions of government-backed loans.
We sometimes see sellers or their agents may (wrongly) give preferential treatment to buyers with conventional loans over FHA loans. This is often because FHA loans can come with more restrictions that sellers might not want to deal with. It’s important to talk to your lender about all your options so you can make the strongest possible offer.
| Component | FHA Loan | Conventional Loan |
| Loan Term | 15 and 30-year | 15 and 30-year |
| Minimum Down Payment | 3.5% of the home price (or 10%, if your credit score is between 500 and 580) | 3% |
| Minimum Credit Score | 580 with 3.5% down, 500 with 10% down | 620 |
| Debt-to-income requirements | 43% to 50%, generally | 43% |
| Co-borrower allowed | Yes, even if they don’t reside in the home | Yes, only if they reside in the home |
| Residency type | Primary residence only | Primary, secondary, or investment property |
| Mortgage insurance (if your down payment is less than 20%) | Mortgage insurance premiums (MIP), which can be more affordable than PMI for some borrowers, but it has an upfront insurance premium, roughly 0.50% per year. MIP can be canceled after 11 years if you put 10% down. | Private mortgage insurance (PMI), where costs range from 0.22% to 2.25% of the loan amount and are higher for larger loans. You can cancel PMI once they’ve paid off 20% of the home’s value |
| Special conditions | Must be appraised by an FHA-approved appraiser Must occupy within 60 days of closing (not ideal if you need a major renovation) Inspection must meet minimum property standards (can be more stringent than a traditional inspection) | NA |
Which is the better: an FHA or a Conventional loan?
The most accurate (though somewhat frustrating) answer is: it depends.
But, thankfully, your Loan Officer will be able to talk through the pros and cons of each loan time and their relative costs in your specific situation so that you get the best option. They might have different interest rates based on the specifics of your financial situation, for example, or you might have different amounts of cash upfront that make one option more or less appropriate. When you apply for a loan, you might not know which loan type you want, and that’s OK. Tomo Mortgage offers both FHA and Conventional (Conforming) loans, and we work with first time homebuyers all the time to work out the tradeoffs and advantages. Usually, the right answer is the one that will save you the most money.
If you’d like to get started or learn more about your options, you can start a pre approval process here.