Know the Difference: FHA vs. Conventional Home Loan

It’s commonly believed that FHA loans are for first-time home loan applicants, while conventional loans are for established buyers. But this is not completely true. The difference between these two types of loans is that FHA loans are backed by the Federal Housing Administration, while conventional loans aren’t. Both loans have distinct advantages, but eligibility requirements vary a lot. Here’s how they differ.

Minimum Down Payment

FHA loans require loan applicants with credit scores of 580 or higher to make a minimum down payment of at least 3.5%. Conventional mortgages usually require a 20% down payment. However, people with high credit scores and ample savings may be allowed to make a lower down payment.

Credit Scores

FHA loans are typically easier to qualify for, given that they require a minimum credit score of just 580. Those who are willing to put down 10% of the home’s purchase price can get an FHA loan even if their credit score is between 500 and 579. In comparison, conventional home loans require loan applicants to have a credit score of 620 or higher.

Debt-To-Income Ratio

Your debt-to-income ratio or DTI is the percentage of your monthly income (pretax) that you spend toward paying off your debts, including your student loans, mortgage, auto loans, credit card payments, etc. The higher this ratio, the more likely you are to have trouble paying your home loan bills. For FHA loans, your DTI ratio needs to be 50% or less to qualify. In comparison, conventional loans allow the DTI ratio to be 43% or less.

Mortgage Insurance

Mortgage insurance lessens the risk for the lender in case of payment defaults. Conventional loans require borrowers to have mortgage insurance if their down payment is 20% or less. FHA loans, however, require mortgage insurance irrespective of what down payment was made.

Loan Limits

FHA and conventional loans limit how much you can borrow. The maximum loan size usually varies from county to county, and regulators can change loan limits from time to time, as well.