Overview: FHA and Conventional Loans
FHA loans and conventional loans are the two most common types of mortgage financing in the United States. FHA loans are insured by the Federal Housing Administration and designed for borrowers who may have lower credit scores or smaller down payments. Conventional loans are not government-insured and typically follow guidelines set by Fannie Mae and Freddie Mac. Each has distinct advantages depending on your financial situation.
Down Payment Comparison
- FHA: Minimum 3.5% down payment with a credit score of 580 or higher. 10% down if your score is 500-579.
- Conventional: Minimum 3% down for first-time buyers (Fannie Mae HomeReady or Freddie Mac Home Possible programs), though 5-20% is more common. No government-backed reduced rate for lower credit scores.
While the down payment requirements appear similar, the key difference is accessibility. FHA loans are available to borrowers with lower credit scores at the 3.5% tier, whereas conventional loans with 3% down typically require a credit score of 620 or higher.
Credit Score Requirements
- FHA: Minimum 500 (with 10% down) or 580 (with 3.5% down).
- Conventional: Generally requires a minimum of 620, with better rates available at 740 and above.
For borrowers with credit scores between 580 and 619, FHA is often the only viable option for low-down-payment financing.
Mortgage Insurance
This is one of the most significant differences between the two loan types:
- FHA MIP: Requires both an upfront premium (1.75% of the loan amount) and annual premiums (0.50-0.55% for most borrowers). With less than 10% down, MIP lasts the life of the loan.
- Conventional PMI: Required when the down payment is less than 20%, but rates vary based on credit score and LTV (typically 0.2% to 1.5% annually). PMI can be canceled once you reach 20% equity and automatically terminates at 22% equity.
For borrowers with good credit (720+), conventional PMI rates can be significantly lower than FHA MIP. For borrowers with lower credit scores, FHA MIP may actually be more competitive since it does not adjust based on credit score.
Loan Limits
- FHA: Varies by county. In most Pennsylvania counties, the 2024 limit is $498,257 for a single-family home. Higher in certain areas.
- Conventional: The 2024 conforming loan limit is $766,550 nationwide, with higher limits in designated high-cost areas.
Property Requirements
- FHA: The property must meet FHA Minimum Property Requirements (MPR) as verified by an FHA-approved appraiser. These standards address safety, security, and structural soundness. Issues like peeling paint, missing handrails, or faulty electrical can require repair before closing.
- Conventional: Appraisal standards are generally less strict. Fannie Mae and Freddie Mac require the property to be habitable but are more flexible about cosmetic issues.
Which Loan Is Right for You?
Choose FHA if: You have a credit score below 680, have limited savings for a down payment, have higher debt-to-income ratios, or are a first-time buyer who may benefit from more lenient qualification standards.
Choose Conventional if: You have a credit score of 700 or higher, can put down 10-20% or more, want to avoid permanent mortgage insurance, or are buying a property that may not meet FHA property standards (such as a fixer-upper you do not plan to renovate through a 203(k) loan).
Many borrowers start with an FHA loan and later refinance to a conventional mortgage once they have built equity and improved their credit. This strategy allows you to take advantage of FHA's accessibility while eventually eliminating the ongoing cost of mortgage insurance.