FHA vs. Conventional

FHA (Federal Housing Administration) and conventional loans are two types of mortgage loans available to homebuyers in the United States. Here are some key differences between the two:

1. Loan requirements: FHA loans have more relaxed requirements when it comes to credit score. For example, the minimum credit score for an FHA loan is 580, whereas a conventional loan may require a higher credit score. Both FHA and Conventional have low down payment options available for borrowers. FHA loans require a minimum down payment of 3.5%, while conventional loans, depending on the program, require 3% or more (See Fannie 97, Home Possible, and HomeReady in related links).
2. Interest rates: FHA loans typically have higher interest rates than Conventional loans.
3. Mortgage insurance: FHA mortgage insurance is typically more expensive and more difficult to cancel than conventional mortgage insurance. FHA loans require an upfront mortgage insurance premium (MIP) that can be rolled into the loan amount, as well as an annual MIP that is paid as part of the monthly mortgage payment for all loans regardless of down payment size. Conventional loans typically require private mortgage insurance (PMI), which can also be paid as part of the monthly mortgage payment, when down payment and/or equity is less than 20% of the appraised value.
4. Loan limits: FHA loans have a maximum loan limit that varies by county and is typically lower than conventional loan limits. In 2023, the FHA loan limit for a single-family home in most areas is $472,030, while the conventional loan limit is $766,550 for 2024.
5. Property requirements: FHA loans have stricter property requirements than conventional loans. For example, an FHA appraisal may require repairs or improvements to be made before the loan can be approved.
6. Loan types: FHA loans are limited to owner-occupied primary residences and certain types of approved properties, such as multi-unit properties up to four units. Conventional loans can be used for a wider range of property types, including investment properties and second homes.

In summary, FHA loans may be a good option for homebuyers with lower credit scores, while conventional loans may be a better choice for those with higher credit scores. However, the best choice will depend on individual circumstances, so it's important to consult with a mortgage professional to determine which type of loan is right for you.