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FHA vs Conventional Loan: Pros and Cons

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What Is a Conventional Loan?

When you think of a traditional home loan, you probably think of a conventional loan. These loans are insured by private lenders and have stringent requirements to qualify. A lender will take a look at your credit score, your debt to income ratio, and other factors to determine if they can qualify you for a loan.

Often, conventional loans require a credit score of at least 650, because higher credit scores pose less risk to a lender. Many people think that you need a 20% down payment to get a conventional loan, but this is a myth! If you put less than 20% down on a conventional loan, you must pay private mortgage insurance to protect your lender until your payments reach 20% of the purchase price of the home.

What Is an FHA Loan?

As opposed to a conventional loan, an FHA home loan is backed by the federal government and insured by the Federal Housing Administration. If you’re a first time buyer or just beginning your financial journey, an FHA loan can be a good option because the requirements are less stringent. For an FHA loan, you only need a credit score of 500 if you have enough savings to put 10% down on your home. Otherwise, you need a credit score of 580. If you have a 580 credit score or higher, the minimum down payment is 3.5%. This can be huge if you don’t have a lot of savings! However, if you go for an FHA loan, you will have to pay what is known as a mortgage insurance premium, or an MIP. If you put down less than 10%, you pay this for your entire loan. If you put down 10% on your home, you still pay this 1.75% fee for 11 years.
What Is the Difference Between a Conventional Loan and an FHA Loan? Exploring the Pros and Cons

Both traditional and FHA mortgages have their pros and cons. The main drawback of an FHA home loan is that you have to pay MIP no matter what. With a conventional loan, if you put enough money down, you don’t have to worry about mortgage insurance of any kind. Additionally, you can only use an FHA loan to purchase a primary residence, not for rental or investment properties. Conventional loans don’t have this same kind of requirement. However, their upfront financial requirements are stricter.

Conclusion

Weigh the pros and cons of both traditional and FHA loans when you’re considering purchasing a home!