Loan Comparisons

FHA vs. Conventional Loans: Which One Is Right for First Time Homebuyers?

Jan 25, 2019, 9:10 AM | Robin Kocherhans
A couple receives the keys to their first home after deciding between a conventional or an FHA loan

When buying your first home, there are many questions you may find yourself asking, such as:

  • What is a conventional loan?
  • What is an FHA loan?
  • What are the differences between the two?
  • Which home loan is the best for me?

If you've been asking these questions, you're not alone. Finding the perfect loan can feel a bit overwhelming, particularly for first-time homebuyers. However, with some basic information, you'll be able to navigate the mortgage world with confidence.

What Is a Conventional Loan?

Conventional loans are mortgages offered through private lenders. Unlike FHA loans and other mortgage types, they're not backed by the government.

Conventional loans may be the best option for first-time homebuyers who either have great credit or plan to buy a higher-priced home. However, the qualifications are generally harder to meet than for government-backed loans.

Additionally, if you have the savings for a large down payment, you'll likely want to go with a conventional loan. A down payment of at least 20% of the home value will allow you to avoid private mortgage insurance (PMI), making the loan cheaper over the long term than some other types of loans.

However, you don't have to make a large down payment to be able to be approved for a conventional loan. You can be accepted with a down payment as low as 3% of the loan value.

What Is an FHA Loan?

An FHA loan is a mortgage that is backed by the Federal Housing Administration (FHA) and offered by private lenders. The FHA's government guarantee allows lenders to offer benefits that are unique to the FHA loan.

One major benefit of FHA loans is that they have lower credit score requirements than some other loan types.

Basically, because of the government backing, lenders offering FHA loans aren't taking on as much financial risk, so they can afford to finance borrowers with lower credit scores. This is great for first-time homeowners since they're often still establishing their credit and building up their finances.

FHA lenders also offer competitive interest rates, thanks to the FHA guarantee.

Additionally, the minimum down payment is 3.5% and they are fairly easy to refinance if you go with an FHA streamline refinance loan. These types of refinances don't require a credit check, income verification, or home reappraisal.

FHA Loan vs. Conventional Loan

Now that you understand the differences between FHA and conventional loans, how do you figure out which one is right for you?

Some of the things you'll want to consider first are your credit score, how large of a down payment you can make, and your financial and homeownership goals. Let's take a look at each of these three things individually.

Your Credit Score

If you have a low credit score, then you may want to go with an FHA loan. FHA loans accept a credit score as low as 500 to 580, while conventional loans generally require a credit score of 620 or higher.

If you do happen to have a higher credit score, it will probably be better for you to get a conventional loan. If you have a score of 715, for example, you'll enjoy more lending options, like higher loan limits, with a conventional loan than you would with an FHA loan.

When considering this factor, you should ask yourself, "Do I have the credit score for the home and loan I really want?"

If you don't qualify for a conventional loan now but you'd like to access its benefits, you may want to consider working on your credit score and saving up for a larger down payment. One of our loan officers can offer suggestions on the most effective solutions for your specific situation.

The Down Payment

Some conventional loans offer the option of putting only 3% down. If you meet all of the other conventional loan requirements other, this is a great option. Just be aware that you will likely have to make monthly private mortgage insurance (PMI) payments until your loan-to-value ratio reaches between 78–80%.

In comparison, FHA loans require a down payment of at least 3.5%, which is substantially lower than the 5–20% typically associated with other loan types. However, all FHA loans require both an upfront mortgage insurance premium (MIP) in addition to monthly MIP payments for the life of the loan, regardless of your down payment amount.

In comparing the cost of PMI for conventional loans and MIP for FHA loans, PMI is often the less-expensive option because it eventually goes away while MIP payments do not.

Another aspect to consider when comparing down payment requirements for FHA and conventional loans is the availability of down payment assistance programs. FHA loans have a number of assistance programs while those with conventional loans may qualify for the HomeReady™ program if they live in specific low-income areas.

Your Long-Term Goals

What you want in the long run is perhaps one of the most important things you need to think about as a first-time homebuyer. It directly influences what loan you should choose, and it can ultimately help you make the right decision.

For example, you should consider if you want to buy a starter home or your forever home. If you're looking at a more expensive home in your dream neighborhood, you might not get the necessary loan amount from an FHA loan.

You should also consider the amount of time you plan to be in a home. If you're planning on staying there long-term, you'll want to consider the cost of mortgage insurance for each loan type—it's likely that a conventional loan will be the better choice. If you're just planning on living there for a few years, it may be worth it to go with an FHA loan while you work on improving your credit and saving up enough for a long-term home.

Don't forget that refinancing could be an option in your future, which would allow you to switch from your FHA loan to a conventional one down the road. No one knows what interest rates will do, however, so carefully consider what makes the most sense for you.

Turn to the Experts for Help

Choosing the right loan makes a big difference in your homeownership experience. Use the information in this blog to help you figure out what loan is best for you, or feel free to contact one of our loan officers—their expertise can help you hone in on what loan type best matches your needs and current situation.

Robin Kocherhans

Robin has been writing about mortgages for almost 2 years and has been a professional writer for 8. She loves researching and answering your questions about home loans and the mortgage process, as well as helping simplifying complex topics to make them easier for you to understand.