If you’ve started your home loan search, two mortgage types have probably risen to the top of your list: FHA loans and conventional loans. These are some of the most popular loans, and each have their pros and cons. But which one is better for you?
You can get the full scoop on FHA loans here. But today, we’ll be breaking down the (not so) conventional side of this debate. First things first: What is a conventional mortgage?
What is a conventional mortgage?
Don’t let the name fool you—a conventional mortgage isn’t as basic as you think. And that’s a good thing! There’s really no one-size-fits-all when it comes to financing your home.
Unlike an FHA loan (which is insured by the Federal Housing Administration), a conventional loan isn’t insured by any government-backed agency. There are two types of conventional loans:
In a fixed-rate mortgage, your payment will stay the same each month, right up until your mortgage is paid off or you refinance your loan. If you’re looking for something consistent to make budgeting less complicated, this is a great option for you.
In an adjustable-rate mortgage (ARM), your monthly payment changes over time. You could start out with lower payments for a fixed period, but after that window your interest rate will likely change.
What’s the difference between FHA and conventional loans?
We already established that an FHA loan is government-insured while a conventional loan is not. But there are some other key differences to keep in mind in the FHA vs. conventional loan debate. It’s all about the qualifications.
If you choose a conventional loan, you won’t have to meet the property standards required for an FHA loan. So if you’ve got your eye on a fixer-upper that might not pass an FHA inspection, a conventional mortgage might be the way to go.
A conventional loan can absolutely be used for your primary residence, but you can also take one out to purchase a vacation home or investment property. An FHA loan can only be used for your primary residence.
If your down payment is at least 20% of the purchase price, no mortgage insurance is required for a conventional loan. If your down payment is lower, you’ll need private mortgage insurance (PMI) until you’ve paid off 80% of the home’s value.
In an FHA loan, you’ll have to pay for mortgage insurance regardless of your down payment.
The minimum down payment for each type will depend on your credit score, but with an FHA loan it could be as low as 3.5% of the purchase price. Your down payment on a conventional loan could be as low as 3%, but you’ll likely want to put down more to avoid paying PMI.
To qualify for a conventional loan, you’ll need a credit score of 620 or higher. While you only need a score of 580 for an FHA loan, a lower credit score means a higher minimum down payment and rate for both types.
Lenders want to know you’ll be able to make your monthly payments. So if your debt-to-income ratio (DTI) is above 50%, you’ll have a harder time getting approved for any kind of home loan. There’s more flexibility with conventional loans vs. FHA loans, but you’ll want to have a DTI of 43% or less for your best chance at getting approved for a conventional mortgage.
FHA vs. conventional loan: When is a conventional mortgage better?
Everyone’s home buying journey is different, so what’s right for you will depend on your financial situation, your homeownership goals, and that gut feeling that tells you, “This is the one.”
Tip: If an FHA loan is the best fit now, you can still refinance to a conventional mortgage later on if your circumstances change.
A conventional mortgage could be the better choice if:
- Your credit score is 620 or higher.
- Your debt-to-income ratio is 43% or less.
- You’re buying a fixer-upper.
- You have enough savings to make a higher down payment (think 20% or more).
- You’re buying a vacation home or investment property.
- You want the flexibility on monthly payments that an ARM offers.
- You don’t want to deal with stricter qualifications involved in a government-backed loan.
So, if you want more flexibility and your finances are in solid shape, a conventional loan could work to your advantage (no disrespect to FHA loans—you know we love you).
Note: To learn more about when an FHA loan is the better choice, check out our previous blog here.
I think a conventional loan is better for me. What are my next steps?
Now you know the answer to the question “What is a conventional mortgage?’ and how it stacks up against an FHA loan. When you’re ready to get the ball rolling on the application process, the next step is to get in touch with a loan originator. Our team is here to help every step of the way.
If you want more flexibility, your credit score is above 620, and you have enough in savings to make a higher down payment, a conventional loan could be a better fit than an FHA loan.