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FHA vs. Conventional Loans: Which Is Better?

Madhushree Kelkar
If you are a first-time home buyer, you may be confused between FHA and conventional loans. Given here are differences between the two and which one fares better.

Did You Know?

Till the year 2005, FHA repair demands were so unreasonable that the sellers used to offer additional discount on the list price to home buyers who preferred to avail conventional loans instead. However, these demands have been relatively relaxed today.
If you are in the market for buying a home loan, you may be confused about going for a Federal Housing Administration (FHA) loan or a conventional one.
FHA loans are mortgage loans which are supported by the US Federal Housing Administration mortgage insurance. This loan is not made by the FHA, but only backed by it. These loans have become very popular off late as they have relaxed credit-qualifying guidelines compared to conventional loans.
While opting for conventional loans, follow the guidelines set by Fannie Mae and Freddie Mac; anything that goes beyond these standards are called non-conforming conventional loans. Both FHA and conventional loans come with their own share of advantages and disadvantages.

FHA Vs. Conventional Loans

Preferred By

FHA loans are preferred by low- to moderate-income home buyers and people who are buying a home for the first time.

Usually, home buyers who have a higher income or healthy financial conditions prefer conventional loans.

The Verdict: FHA Loans

Backed By

FHA loans are backed by the government.

Conventional loans are a non-government sponsored entity which is not created by the Federal government.

The Verdict: FHA Loans

Insured By

FHA loans are insured by the government.

Conventional lones are not insured as they are non-GSE loans.

The Verdict: FHA Loans

Credit Score Requirement

You can secure an FHA loan if you have a credit score of 500 points. However, if you want to utilize the low down payment option, you need 580 points.

In order to avail a conventional loan, you must have a higher credit score of over 620 points.

The Verdict: FHA Loans

Down Payment Requirement

An FHA loan has a relatively lower down payment of 3.5%.

For conventional loans, the down payment is usually higher―about 5 - 20%. The amount may depend on the type of property.

The Verdict: FHA Loans


For a fixed rate FHA loan, the duration is usually 15 - 30 years.

The term for a conventional loan lasts between 15 - 30 years for fixed rate interest, and the adjustable one fluctuates depending on the standard financial index like LIBOR.

The Verdict: Conventional Loans

Type of Interest Rates

Most of the FHA loans have a fixed rate, while only a few are available with adjustable interest.

Conventional loans offer the convenience of both fixed or adjustable interest rates based on your choice.

The Verdict: FHA Loans

Qualification After Bankruptcy

You can qualify for an FHA loan -
• One year after filing for Chapter 13 bankruptcy
• Two years after Chapter 7
• Three years after a foreclosure

In case of conventional loans, you will have to wait for a minimum of two or more years after filing for all these events.

The Verdict: FHA Loans

Mortgage Insurance

In case of FHA loans, getting upfront and annual mortgage insurance for life is compulsory. This increases the cost of the mortgage and makes it very expensive. Annual premium can be avoided if you have 22% or above as a part of the home equity and 15 years or less of loan term.
In case of conventional loans, you don't have to pay mortgage insurance if you have 20% equity position in the property or have made 20% down payment.

The Verdict: Conventional Loans


In case of FHA, PMI is usually more than that of conventional loans. Irrespective of the equity standing of the property, one has to pay the PMI for 5 years of the mortgage.
In case of conventional loans, PMI is less than FHA. One only has to pay the PMI till he completes 78% loan to value ratio, or attains 22% equity position of the property.

The Verdict: Conventional Loans

Mortgage Limit

In case of FHA, the limits on mortgage differ by county. Regions which have a higher real estate value will have higher loan limits.

Conventional loans do not have limits on the mortgage amount.

The Verdict: Conventional Loans

What Does the Cost Include

FHA loans include ongoing insurance premiums and mortgage insurance premiums.

Conventional loans include origination charges, down payments, point fees, appraisal fees, and mortgage insurance cost.

The Verdict: Draw


Some second homes, condo complexes, and investment properties held by non-owners may not get accepted for financing through FHA.

Conventional loans are easily approved, and if you are not going to occupy the property, conventional loans are perhaps the only option you have.

The Verdict: Conventional Loans

Down Payment Gift

FHA loans will usually allow you to accept money as 'gift' or 'loan' from friends, family, charities, and nonprofit organizations for making payment towards the down payment.

Conventional loans will not allow you to accept money as 'gift' for paying the down payment.

The Verdict: FHA Loans

Underwriting Standards

FHA loans have their own guidelines and do not follow the stringent underwriting standards set by Fannie Mae and Freddie Mac.

Conventional loans have to follow the strict underwriting standards of Fannie Mae and Freddie Mac.

The Verdict: FHA Loans

Assumable Loans

FHA loans are assumable, and a loan in your name can be transferred to the new owner of the house, provided he has the necessary credit requirement.

Most of the conventional mortgage loans availed after 1980 are not assumable.

The Verdict: FHA Loans

Repayment Options

In case of FHA loans, loan repayment options are flexible, and there are many different plans available for the same.

Most of the conventional loans do not have flexible repayment options.

The Verdict: FHA Loans

Guidelines and Regulations

As an FHA loan is a government program, you will have to follow all the guidelines and regulations. You may even get prepayment penalties.

In case of conventional loans, the rules and regulations are less stricter.

The Verdict: Conventional Loans
Thus, FHA is a right choice for home buyers who have a lower income, unfavorable credit score, or past bankruptcies. The relaxed credit-qualifying guidelines of FHA loans help many people. Conventional loans, on the other hand, is recommended for people who have a higher credit score and can make a larger down payment.
Now that you know details about both types of loans, consult a financial adviser before picking a winner between the two for your home buying requirement.