FHA vs Conventional: Which mortgage loan is best for you?

If you are a homebuyer considering a mortgage loan, then you've probably heard of FHA loan and Conventional loan. Both loan programs are great for buying your house, but you can only choose one.

Choosing the right home loan can be overwhelming, especially if you are a first-time homebuyer. To help you decide which one is best for you, we've listed the main differences between FHA loan and Conventional loan.

1. Definition

FHA (Federal Housing Administration) loan is a government-backed program targeted to low to moderate-income homebuyers.

A conventional loan is not insured by the government, but instead it is guaranteed by private lenders.

2. Minimum Credit Score

FHA loan requires a minimum credit score of 500.

For a conventional loan, you need to have a minimum credit score of 620.

3. Down Payment

For FHA, if your credit score is 580 and higher, you are qualified to give a down payment of 3.5%. But if it's less than 580, then you are required to put a 10% down payment.

On a conventional loan, the minimum down payment required is 3% for first-time homebuyers and 5% for non-first-time homebuyers.

4. Interest Rates

FHA loan generally has a lower interest rate because it's insured by the government.

For the conventional loan, it's interest rate highly depends on your credit score. This means that the higher your credit score, the lower the interest rate is, and vice versa.

5. Loan Terms

For an FHA loan, you can have either a 15-year mortgage or a 30-year mortgage.

A conventional loan allows more flexibility by giving a 10, 15, 20, or 30-year loan.

6. Loan Limits

As of 2020, the loan limit for FHA loans is about $331,760.

And for conventional loans, the limit is about $510,400.

Keep in mind that the loan limit amount depends on the county you're buying your house from.

7. Debt-to-Income Ratio

The debt-to-income ratio refers to the amount of debt you have to pay every month versus the income that you receive. A higher DTI might mean that you are struggling to pay the bills.

For FHA, your DTI needs to be 50%.

With a conventional loan, some lenders allow a DTI of 50% but mortgage approval is higher if it's 43% or less.

8. Occupancy Requirements

The home you are buying with an FHA loan must be your primary residence for the next 12 months.

A conventional loan does not have an occupancy requirement.

However, if you're going to use the property as an investment, you might be required to give a 30% down payment.

9. Mortgage Insurance

Mortgage insurance is there to protect the lenders if ever you default on the loan.

FHA loan requires MIP (Mortgage Insurance Premium) which would cost the same regardless of your credit score and down payment amount. Usually, you'll be expected to pay MIP for the life of the loan.

A conventional loan has PMI (Private Mortgage Insurance). PMI will automatically get canceled if you pay a 20% down payment or once your home equity reaches 78% of the purchase price.

Summary:

FHA Loan

• Lower credit scores
• Minimum down payment of 3.5%
• Two loan term options
• MIP lasts for the life of the loan

Conventional Loan

• Higher credit scores
• Minimum down payment of 3%
• Flexible loan terms
• PMI can be canceled