When you’re shopping for a home, choosing the right mortgage can feel almost as important as choosing the right house. Two options you’ll probably hear about are FHA loans and conventional loans.
At first glance, they look similar. Both can offer relatively low-down payment options, and both can be used by qualified homebuyers to finance a primary residence. But differences in credit considerations, mortgage insurance, property requirements, and overall costs can make one option a better fit for your situation than another.
So, FHA vs. conventional: how do you know which one makes sense for you?
Let’s break it down.
An FHA loan is insured by the Federal Housing Administration (FHA). That government insurance helps protect the lender if a borrower defaults, allowing FHA-approved lenders to offer financing under FHA guidelines.
A conventional loan is not insured by the federal government. Instead, conventional mortgages typically follow guidelines established by organizations such as Fannie Mae or Freddie Mac.
Neither option is automatically “better.” What matters is how each fits your finances and the home you want to buy.
Think you need a large down payment to buy a home? That’s not always the case.
Both FHA and conventional financing can offer low down payment options for qualified borrowers. FHA loans may require as little as 3.5% down, while some conventional programs offer down payments as low as 3%.
The better option isn't necessarily the one requiring the least cash upfront. Looking at your down payment along side mortgage insurance, interest rate, monthly payment, and overall costs gives you a much clearer comparison.
The takeaway: Don't choose a mortgage based on down payment alone. Compare how much cash you'll need at closing along with the monthly payment, mortgage insurance, interest rate, and other loan costs.
Credit is one area where FHA and conventional loans can differ significantly.
FHA loans tend to offer more flexibility when it comes to credit. At Homestead Funding Corp., FHA financing may be available to qualified borrowers with credit scores as low as 600. Other credit, debt-to-income, underwriting, and program requirements also apply
With conventional financing, credit is also an important part of qualification and pricing. A borrower’s credit profile, along with factors such as down payment, debt-to-income ratio, property type, and the specific loan program, can affect both eligibility and overall loan costs.
That’s why a borrower who qualifies for both FHA and conventional financing may see very different numbers when the two options are compared side by side.
In other words, being eligible for both options doesn't necessarily mean they'll cost the same.
Mortgage insurance is an important part of an FHA vs. conventional loan comparison.
FHA loans generally include an upfront mortgage insurance premium (UFMIP) plus an ongoing annual mortgage insurance premium (MIP). HUD lists the upfront premium for most FHA mortgages at 1.75% of the base loan amount.
How long annual FHA mortgage insurance remains in place depends on factors such as the original loan-to-value ratio and loan terms. For many FHA loans with an original LTV above 90%, annual MIP applies for the mortgage term.
For conventional financing, private mortgage insurance, commonly called PMI, generally comes into play with higher loan-to-value financing. The cost isn't necessarily the same for every borrower and loan.
Another significant difference is that conventional mortgage insurance may eventually be canceled or terminated if applicable requirements are met. Fannie Mae, for example, notes that its HomeReady mortgage offers cancellable mortgage insurance, subject to restrictions.
Why this matters: Two loans with similar down payments can have very different monthly and long-term costs once mortgage insurance is included.
Not sure how mortgage insurance works? Learn more about mortgage insurance and how it can differ by loan program.
Here's an area that can surprise buyers.
An FHA appraisal isn't just about determining value. The property must also meet applicable FHA requirements. Depending on the condition of the home, certain issues may need to be addressed for the property to qualify for FHA financing.
Conventional financing has property eligibility and appraisal requirements as well. Fannie Mae maintains specific appraisal requirements for properties securing conventional mortgages.
The important point is that neither financing option means a property is automatically acceptable simply because you've agreed on a purchase price.
This can become especially important when you're considering a home that needs repairs or has unusual characteristics.
This is where a simple comparison chart can be misleading.
The lowest down payment doesn't necessarily mean the lowest-cost mortgage.
When comparing FHA and conventional financing, look at the whole picture, including:
There are also expenses beyond your down payment to consider when budgeting for a home. Our guide to the costs of buying a home can help you understand what to plan for.
Loan terms and costs can vary considerably by borrower, lender, loan program, and market conditions.
A side-by-side Loan Estimate can make it much easier to see the differences in actual dollars.
Imagine a homebuyer with a 620 credit score, limited funds available for a down payment, and an otherwise qualifying financial profile. Because Homestead Funding offers FHA financing to qualified borrowers with credit scores as low as 600, FHA maybe one option worth considering.
But that doesn't automatically make FHA the best or least-expensive choice. The borrower should still compare the available interest rate, mortgage insurance, upfront costs, monthly payment, and total costs against any conventional financing for which they qualify.
Now consider another buyer with stronger credit and enough cash for the required down payment.
That borrower might find conventional financing attractive because of the loan's pricing, mortgage insurance structure, or overall long-term costs.
And remember, putting 20% down isn't always required. Certain Fannie Mae conventional options permit financing up to 97% LTV for eligible borrowers and properties.
That's actually a great position to be in.
Rather than asking, “Which type of mortgage is better?”, ask:
“Which mortgage makes the most sense for me?”
For example, one option might require less cash upfront while another could offer lower long-term costs. One might work better with your current credit profile, while another could provide advantages based on how long you expect to keep the mortgage.
This is why it's helpful to compare actual loan scenarios instead of relying on general rules about FHA and conventional financing.
There isn't a universal winner in the FHA vs. conventional loan comparison.
The right mortgage depends on your credit profile, available funds, property, loan amount, goals, eligibility, and the rates and costs available when you're ready to buy.
A knowledgeable mortgage loan originator can review both options with you, explain the trade-offs, and help you compare the numbers side by side.
Ready to explore your home financing options? Connect with one of our experienced Mortgage Loan Originators to see which loan programs may fit your homebuying goals.
Homestead Funding offers exceptional customer service and a convenient mortgage process. Whatever your financing needs, our goal is to exceed your expectations.
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