FHA vs. conventional loans

What they are

A conventional loan is not backed by a government agency and usually follows Fannie Mae or Freddie Mac guidelines. An FHA loan is insured by the Federal Housing Administration, which lets lenders offer more flexible qualification terms.

Down payment and credit

• FHA loans allow a down payment as low as 3.5% for borrowers who meet the credit score requirement, which is lower than for many conventional loans.
• Some conventional programs allow as little as 3% down, but they often look for stronger credit.
• Individual lenders may set stricter requirements than the program minimums.

Mortgage insurance

• FHA loans charge an upfront mortgage insurance premium plus an annual premium. Depending on your down payment, the annual premium can last for the life of the loan.
• Conventional loans with less than 20% down require private mortgage insurance (PMI). PMI can generally be removed once you reach sufficient equity.

Loan limits and property rules

Both loan types have limits that vary by county. FHA loans also require the home to meet minimum property standards and to be your primary residence.

Which one fits

FHA can work well for borrowers with a smaller down payment or a lower credit score. Conventional can cost less over time for borrowers with strong credit and a larger down payment. A loan officer can run both scenarios with your real numbers, which is worth doing before you decide.