FHA vs. Conventional Loans: A Detailed Guide

Most homebuyers in the US are caught between a conventional or FHA loan. The usual perception is that conventional loans are for existing homeowners while FHA loans are for first-time home buyers. This blog will offer more insight into FHA vs. conventional loans. 

FHA Loans Versus Conventional Loans

The Federal Housing Administration issues the FHA loans. Conventional loans, on the other hand, are issued by lenders. Each of these loan types comes with specific pros and cons. Additionally, there are qualification criteria for each loan. Comparatively, one of the benefits of an FHA loan is that there is more flexibility, be it credit scores or down payments. You must also remember that the interest rates, refinancing, and insurance requirements differ for loan types. 

When choosing between the two, consider the following FHA vs. conventional comparison chart, which will help you understand the pros and cons of FHA loans.

 

 

Other parameters of FHA vs. conventional comparison chart that you need to consider before making a choice are - 

Mortgage Insurance

Mortgage insurance in FHA loans. It is calculated based on the loan value and term. It also depends on the down payment value. In FHA loans, mortgage insurance does not depend on credit scores.

Mortgage insurance in FHA loans lasts for the complete loan term if the down payment is not more than 10%.  If the down payment is 10% or more, then the mortgage insurance in FHA loans has a term of 11 years. A fee of 1.75% of the loan value is also applicable.

In the case of conventional loans, if the down payment is less than 20%, you need to pay for mortgage insurance. In this case, the mortgage insurance is usually between 0.03% and 0.07% of the loan amount. The insurance amount is lesser if the buyer's credit score is 720 or more.

Mortgage Rates

FHA loans usually have lower mortgage rates than conventional loans, but they work only when the borrower makes the required down payment.

If the borrower cannot make a down payment of up to 10%, then they need to pay mortgage insurance, which increases the mortgage rates even though the initial rates were low.  Even if the borrower pays 10% or more down payment, they must pay mortgage insurance for 11 years. In this case, too, the mortgage rates work out higher.

The mortgage rates for conventional loans are typically higher than FHA loans. 

Loan Limits

Whether you take a conventional or FHA loan, loan limits are based on different parameters. It also matters to the county in which the property is being purchased. The loan limits can be changed yearly by regulators.

The loan limits for FHA loans are - 

• $498,257 in low-cost regions 

• $1,149,825 in expensive markets

• In certain counties, the loan limits are between minimum and maximum.

The Federal Housing Finance Agency sets the conforming limits for conventional loans. In 2024, the loan limit in the US is $766,550. There are jumbo loans, too, where the threshold is higher. However, the underwriting standards are comparatively more stringent.

Property standards

When assessing the pros and cons of FHA loans, you need to evaluate the intended use of the property as well as the property's conditions. Appraisals by FHA are very strict compared to conventional appraisals. The FHA appraises the value of the property as well as its safety and structural integrity. It is also assessed if the property adheres to the local code restrictions. This is one of the significant benefits of FHA loans.

In conventional loans, appraisals are more focused on the property's market value. If you default on paying the mortgage and a foreclosure becomes essential, the lenders can sell the property to get their money back. 

Another aspect of an FHA loan is that the property should be your primary residence. Conversely, conventional loans can be availed to buy a property where you live, or it could be an investment property or a vacation home.

Mortgage Refinancing

This is another benefit of an FHA loan. For refinancing, your income verification is not required. Similarly, no home appraisal is required. They also do not require a credit check. All you need to prove is that the property is your primary residence. The proof can be in the form of utility bills and employment records. In the case of extenuating circumstances, there could be additional paperwork required.

In the case of conventional loans, Freddie Mac's list mentions the following -

• Recent tax returns.

• W-2s for the last two years.

• A month of paystubs.

• Recent mortgage statement.

• Homeowner's Insurance policy

Besides, in conventional loans, lenders will assess your credit and debt history like the mortgage received the first time.

To summarize, FHA loan pros and cons should be thoroughly assessed about conventional loans. In the case of conventional loans, the credit scores required are higher than those required for FHA loans. The down payments in the case of FHA are higher compared to conventional loans. The property standards are liberal in conventional loans and stricter in FHA loans. Speak to a mortgage loan officer like Total Mortgage if you need help understanding the FHA vs. conventional comparison chart.