FHA vs Conventional Loan
What is the Difference?

by Jeff Ragan

FHA vs Conventional loan - which is a better choice? Both these terms are used when you are looking for your first mortgage. Below I will explain the difference and the pros and cons.

Many people get confused on the difference between these two types of loans. It is like a tug of war deciding on these two type of loan products.

Simply put, FHA loans are for anybody that wants to use it.

It is a loan program where the US Government guarantees the home loan to the lender.

That guarantee makes it easier to obtain this type of loan. Let me explain more about this type of program below.

FHA Loans

FHA also offers a low down payment of 3.5%, low closing costs and does not require that you have perfect credit. Whereas the conventional mortgage loan has a higher down payment, higher closing costs and requires a higher credit score.

Let me use an example so you can see what I mean when comparing the FHA vs Conventional loan products.

fha vs conventional loan explained

Say you want to buy a house for $200,000:

  • With FHA your down payment would be $7,000 (3.5%) and on the conventional loan it would be $20,000 (10%).
  • The closing costs on an FHA loan can be included into your loan up to 6% of the sales price. On a conventional loan, it normally would be 3% or less.
  • Then the credit requirements for an FHA loan are less restrictive. Credit scores of 620 and above will satisfy the FHA lender whereas the conventional lender may want to see 700-720.

Comparing just these 3 things shows that FHA loans will always win in a discussion of FHA vs Conventional loan.

But now let's consider the pros and cons of the conventional product.

Conventional Mortgages

Where the conventional mortgage loan wins is they do not usually require mortgage insurance. But the FHA loans do.

Keep in mind mortgage insurance is different than house insurance. Mortgage insurance insures the mortgage where house insurance insures the home.

Both loan types require house insurance. FHA requires the additional insurance to cover the mortgage.

Perhaps you do not like the idea of paying additional insurance. Then conventional mortgages would be a better choice for you.

Another pro of the conventional loan is usually a better interest rate. Of course that will depend on your credit score.

Mortgage Summary

When we look long and hard at the first option, the FHA loan may have a slightly higher interest rate than the conventional loan but it's much easier to get a mortgage using it. Check around and try to work with lenders who offer FHA loans.

FHA is the mortgage I first used when buying a house and I would not be embarrassed to use it again. This is a loan program that has been offered since 1934. It has helped millions of people become home owners.

There are other differences between FHA vs Conventional Loan comparison. But the few I mentioned above makes all the difference in the world for most first time buyers. I guess the question remaining is, are you ready to get your first mortgage?

Where Would You Like to Go Next?

Would you like to understand more about FHA loans? Discover a load of information on the page FHA Home Loans.

Perhaps you would like to understand the various loan programs out there. Then jump in and read Home Buying Programs to help you with your choices.

Want to have more questions answered before you proceed? Have a Question is a great place to investigate answers to questions others have asked or to ask your own. Go ahead....pick my brain!

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