FHA vs. Conventional Loans: Key Differences

By Michelle Shelton – New American Funding

When it comes to selecting a home loan, there are several loan types to consider. Two of the most common are an FHA loan and a Conventional loan. Each loan type operates a bit differently and qualification requirements for one versus the other can vary. Also, these are only two of the various home mortgage options that are available to homebuyers. If you are a first time homebuyer, buying a second home or buying a vacation home, your options can vary. But for many homebuyers, comparing FHA vs. Conventional is a good place to start.

FHA vs. Conventional Loan Types: Which is Right for Me?

An FHA Loan allows for lower credit scores and can be easier to qualify for than a Conventional Loan.  However, Conventional loans may not require mortgage insurance with a large enough down payment. The benefit of FHA vs. Conventional comes down to the individual needs of the borrower.

With conventional loans, you are required to pay for mortgage insurance for down payments under 20%.  With FHA loans, mortgage insurance is required regardless of the down payment amount. Credit score requirements vary for conventional loans and FHA loans.

FHA vs Conventional Loans Comparison Chart

	Conventional 97 Loan	FHA Loan
Minimum Down Payment	3%	3. 5%
Minimum Credit Score	620	500*
Maximum Debt-to-Income Ratio	45%	57%
Loan Limit for 2022 (in most areas)	$647,200	$420,680
Income Limit	No income limit	No income limit
Minimum Out-of-Pocket Contribution	0% (Down payment and closing costs can be 100% gift funds, grants, or loan)	0% (Down payment and closing costs can be 100% gift funds, grants, or loan)
Mortgage Insurance	Monthly payments are required if you have a down payment of less than 20%, but generally, the insurance auto terminates when your loan-to-value ratio reaches 78%.	Upfront Mortgage Insurance Premium required, which may be paid in full at loan closing or financed over the life of the loan. For loans with loan-to-value ratio greater than 90%, a monthly mortgage insurance premium is required for the life of the loan. For loans with LTV ratio equal to or less than 90%, monthly mortgage insurance is required for 11 years.

FHA vs. Conventional Loans: Key Differences

FHA loans require mortgage insurance regardless of down payment amount, compared to conventional loans where you need mortgage insurance for down payments under 20%.  FHA mortgage insurance payments will be the same regardless of your credit score.

FHA Loans
• Lower credit scores allowed
• More rigid property standards
• Somewhat higher down payment needed
• Monthly mortgage insurance required for the life of the loan on mortgages where the LTV exceeds 90%. • For loans where LTV is less than or equal to 90%, monthly mortgage insurance premiums required for 11 years

Conventional Loans
• Higher credit score needed (at least 620)
• Slightly smaller down payments allowed
• Private Mortgage Insurance (PMI) is required for down payments less than 20%
• More liberal property standards
 
Disclaimer: Broker Solutions, Inc. dba New American Funding. NMLS #6606. http://nmlsconsumeraccess.org. Corporate office 14511 Myford Rd., Suite 100, Tustin, CA 92780. Phone: (800) 450-2010. This is not a loan commitment or guarantee of any kind. Loan approval and rate are dependent upon borrower credit, collateral, financial history, and program availability at time of origination. Rates and terms are subject to change without notice. [10/2022].