Should You Choose a Conventional Loan or an FHA Loan?

The two most popular home loan programs are the FHA loans and the conventional loan. Both can be great options for first-time homebuyers, but each offer pros and cons. At Chris Doering Mortgage, our loan experts are knowledgeable on a range of home loan programs.

Here, we outline the key differences between these two home loans and the advantages and disadvantages of each.

FHA Loan

FHA loans are meant to protect the borrower from having to foreclose on their home. Notably, the FHA (Federal Housing Administration) does not actually provide home loans, but rather guarantees and ensures these loans should the borrower encounter financial difficulty. 

Pros and Cons of an FHA Loan

FHA loans offer many advantages for home buyers. Firstly, the FHA takes into account that not every home buyer has the best credit, which is why you can receive FHA loan approval with a minimum credit score of 580. This allows a wide range of buyers the flexibility they need to purchase a home.

Other FHA loan benefits include flexible qualification requirements and low interest rates. Also, because FHA isn’t actually providing the loan, it prevents the lender from taking on any financial risk by extending additional credit to borrowers who would not typically qualify for a conventional loan.

However, there are some restrictions to keep in mind. Firstly, although the requirements are more flexible, they are also very specific. For example, the lender you choose must be FHA approved. Also, FHA loans only apply to owner-occupied properties. So if you’re interested in purchasing an investment property, an FHA loan will not be an option for you.

Disadvantages of an FHA loan include upfront mortgage insurance. Keep in mind that if you pay the minimum down payment then you will also have to pay mortgage insurance for the life of the loan.

Conventional Loan

In contrast, conventional loans are fairly straightforward. The requirements for qualification include many items you’d expect to see when applying for a home loan. These loans are ideal for people with great credit and a low debt-to-income ratio. On the other hand, these loans have tighter qualifications standards. 

Pros and Cons of a Conventional Loan

Unlike FHA loans, there is no insurance premium required and higher loan limits. Without mortgage insurance, you can have a lower monthly cost. Also, conventional loans can be used for all property types (such as second homes or investment properties), whereas FHA loans are limited to owner-occupied properties.

One drawback of conventional loans can be that qualified borrowers are subject to higher down payments and higher mortgage rates.

Additionally, conventional loan rates are much more affected by credit score (740+ is prime credit), so if you have a bad credit score you will be more likely to get a high interest rate.

The Verdict

The process of choosing between an FHA loan and a conventional loan can be as unique as the borrower themselves. With so many variables to consider, from credit scores to interest rates, etc., it’s safe to say that education is key when researching the right loan for your home.

The more you know, the easier the process will become. At Chris Doering Mortgage, we offer the highest level of customer service in the mortgage industry along with a variety of educational tools.  Our experienced team understands that choosing between an FHA loan and a conventional loan can require intricate attention to detail, which is why we promise to guide you every step of the way.