FHA Loan vs. Conventional Loan

February 22, 2012 48 Comments »
FHA Loan vs. Conventional Loan

Our latest mortgage match-up pits FHA loans against conventional loans, both of which are popular options for homeowners these days.

In recent years, FHA loans have surged in popularity, largely because subprime lending (and Alt-A) was all but extinguished as a result of the ongoing mortgage crisis.

Some even claim FHA loans are the “new subprime,” mainly because of the low down payment and credit score requirements, despite originally being designed for low and moderate-income borrowers.

But you don’t have to be a subprime borrower to take advantage of an FHA loan.

FHA Loans Are a Great Low Down Payment Option

As noted, these government-backed home loans have become insanely popular. The main selling point of an FHA loan is the 3.5% minimum down payment requirement.

However, in order to qualify for the flagship low down payment option, you need a minimum credit score of 580.

And 580 is just the FHA’s guideline – individual banks and mortgage lenders still need to agree to offer such loans.  So there’s a very good chance you’ll need an even higher credit score. Of course, a 580 credit score is pretty dismal…

[How to get a mortgage with a low credit score.]

Along with that, an eligible donor can provide gift funds for 100% of the borrower’s closing costs and down payment.  And no reserves are required if it’s a 1-2 unit property.  In other words, you don’t need much if any cash to finance your home purchase.

Update: You can now get a conventional loan with just 3% down thanks to new guidelines issued by Fannie Mae and Freddie Mac.

FHA Loans Good for Those with Poor Credit


The screenshot above details when FHA wins out over conventional lending, and it tends to happen if credit scores fall below 680.

The other major selling point to an FHA loan is that the minimum credit score is 500. Again, this is subject to lenders actually offering programs for scores this low. And scores between 500 and 579 require a minimum down payment of 10%.

But FHA loans can be a good option for those with poor credit who are determined to get a mortgage.

Another benefit to going with an FHA loan is the higher loan limit, which is as high as $729,750. This can be a real lifesaver for those living in high-cost regions of the country (this limit has since dropped to $625,500 as of 2014).

Meanwhile, conventional conforming loans backed by Fannie Mae and Freddie Mac are capped at $625,500. Anything above that is considered a jumbo loan, and will come with a higher mortgage rate.

Speaking of rates, FHA loans tend to come with slightly lower interest rates, though one has to consider the entire payment (with mortgage insurance included) to determine what’s the better deal.

The box above assumes an interest rate of 4% for an FHA loan and 4.29% for a similar conventional one.

FHA Loans Subject to Mortgage Insurance

We’ve talked about some benefits of FHA loans, but there are drawbacks as well.

The major one is the mortgage insurance requirement. Those who opt for FHA loans are subject to both upfront and annual mortgage insurance premiums.

The upfront mortgage insurance requirement is unavoidable, and the annual premium can only be avoided if you have 22 percent or more home equity and a loan term of 15 years or less.

All other borrowers must pay the annual mortgage insurance premium for a minimum of five years, which will clearly increase the cost of the mortgage.

[Note that FHA insurance premiums are also slated to increase!]

Keep in mind that FHA loan offerings are also pretty basic. They offer both purchase money mortgages and refinance loans, but the choices are slim.

In other words, you’ll most likely be stuck with a 30-year or 15-year fixed, or a 5/1 adjustable-rate mortgage. So if you’re looking for something a little different, the FHA probably isn’t for you.

Update: Many FHA loans now require mortgage insurance for life, making them extremely unattractive and expensive!

***Update 2: The FHA is lowering annual mortgage insurance premiums by 50 basis points, which should make FHA loans a cheaper option in many cases!!!

Conventional Loans Offer Many More Options

That being said, let’s discuss conventional loans, an alternative to FHA loans which tend to offer a lot more variety.

With a conventional loan, which includes both conforming and non-conforming loans, you can get your hands on pretty much anything from a 1-month ARM to a 30-year fixed, and everything in between.

So if you want a 10-year fixed mortgage, or a 7-year ARM, a conventional loan will be the way to go.

Conventional mortgages also aren’t capped at a certain loan limit, assuming they are non-conforming. For those who need a true jumbo loan, a conventional mortgage will be the only way to obtain financing.

No Mortgage Insurance Requirement on Conventional Loans

Additionally, you won’t be subject to mortgage insurance premiums if you go with a conventional loan, assuming you put 20% down, or have at least 20% equity when refinancing.

Even if you’re unable to put 20% down, there are low down payment programs that don’t require mortgage insurance.

In fact, the Fannie Mae Homepath program only requires a three percent down payment and does not require mortgage insurance (the DP requirement has since been increased to 5%).

However, there are select lender programs that offer 3% down with no MI, so in some cases you can put down even less than an FHA loan without being subject to that pesky mortgage insurance.

Generally, conventional mortgages require a down payment between five and 20 percent, so low down payment borrowers will still want to consider FHA loans first.

You Can Get Conventional Loans Anywhere

Another plus to conventional mortgages is that they’re available at pretty much every bank and lender in the nation.  That means you can use any bank you wish and/or shop your rate quite a bit more.  Not all lenders offer FHA products, so you might be limited in that respect.

Additionally, conventional loans can be used to finance just about any property, whereas some condo complexes (and some houses) aren’t approved for FHA financing.

The FHA has minimum property standards that must be met, so even if you’re a great borrower, the property itself could hold you back from obtaining financing.  In other words, you might have no choice but to go the conventional route.

The same goes for second homes and non-owner investment properties. If you don’t intend to occupy the property, you will have no choice but to go with a conventional loan.

Final Word

These days, both FHA loans and conventional loans could make sense depending on your unique loan scenario.

Both offer competitive mortgage rates and closing costs, so you’ll really have to do the math to determine which is best for your particular situation.

Even with mortgage insurance factored in, it may be cheaper to go with an FHA loan if you receive a lender credit or a lower mortgage rate as a result.

Conversely, a slightly higher mortgage rate on a conventional loan may make sense to avoid the costly mortgage insurance tied to FHA loans.

Your loan officer or mortgage broker will be able to tell if you qualify for both types of loans, and determine which will cost less both short and long-term.  Ask for a side-by-side cost analysis.

Lastly, be sure to consider the property as well, as both types of financing may not even be an option.

FHA Loan Advantages

  • Lower down payment requirements (not anymore if you get 97% LTV via conventional)
  • Lower credit score requirements
  • Lower mortgage rates
  • May be easier to qualify for than a conventional loan
  • No prepayment penalty
  • No reserve requirement (for 1-2 unit properties)
  • Gift funds can cover 100% of closing costs and down payment
  • Streamlined FHA refinances are fast, cheap, and easy

FHA Loan Disadvantages

  • Subject to mortgage insurance (for full term of mortgage in many cases)
  • Mortgage insurance harder to cancel
  • Fewer loan options than conventional loans
  • Only available on owner-occupied properties
  • Many condominium complexes aren’t approved for FHA financing
  • Loan limit of $625,500 in high-cost areas, much lower in more affordable regions
  • Generally only allowed to have one FHA loan

Conventional Loan Advantages

  • No mortgage insurance requirement if 80% LTV or lower
  • Can cancel existing mortgage insurance at 80% LTV
  • Can be used on all property and occupancy types
  • Many more loan program options
  • Can hold numerous conventional loans
  • No maximum loan limit and conforming limit higher than the FHA floor
  • More lenders to choose from (nearly every bank offers conventional loans)

Conventional Loan Disadvantages

  • Higher down payment requirements
  • Higher credit score requirements
  • Higher mortgage rates
  • May be more difficult to qualify than FHA loan
  • Mortgage insurance still required for loans above 80% LTV
  • Reserves often required to qualify
  • Possible prepayment penalty


  1. Justin McClelland February 15, 2013 at 11:40 am -

    I appreciate you breaking down these differences in summary. It surely beats reading thru the dry content of hud.gov and other sites to get a quick snapshot of the two types.

  2. Leora June 30, 2013 at 8:06 am -

    Thanks for the side-by-side comparison. I’m going to have the bank show me both options to see which will cost me the least. I know the insurance costs went up, but if the interest rate is cheaper, it could be better to go with the FHA.

  3. Betty November 6, 2013 at 6:20 pm -

    I was told that my rate on an FHA loan would be about 0.25% cheaper than a conventional loan, but with mortgage insurance premiums factored in the costs eclipse the interest rate savings. Why is the FHA charging so much for insurance. What’s the point of offering a low rate if it doesn’t really cost less?!?!?

  4. Colin Robertson November 7, 2013 at 10:06 am -

    It’s great that you picked up on that. You need to look at both the rate and the costs to get an accurate picture of which mortgage may be best for you. The FHA has increased mortgage insurance premiums several times now to shore up its capital reserves after making a bunch of high-risk, bad loans in the past. So essentially today’s FHA borrower is paying for the offenses of the past. If rates and costs were low, the FHA would be inundated with loan applications, as it was before their most recent cost increases.

  5. Andrew March 31, 2014 at 6:06 am -

    yes betty it is pointless im paying almost 300 a month on mip which when u add it up is way more than a regular high interest conventional and Im stuck with it for 9 yrs so point is don’t just look at the low interest rate from fha

  6. Chandru August 31, 2014 at 8:14 am -


    I am planning to purchase a house worth 670k in Culver City area. I heard FHA has a maximum financing of unto 625,500. So, i am making 7% down payment as against 3.5%. I am also paying MIP. So i would want to know can i get any conventional loan with 7% down payment for purchase price 670k….i was told minimum is 10% down for conventional loan for loan value above 430k. Please let me know if i have any option……

    Best Regards

  7. Colin Robertson September 2, 2014 at 11:44 am -


    It’s possible to go conventional with just 5% down (or even lower in some cases), though it might be difficult to find such a lender at the higher loan limits you mentioned. You’re probably better off putting 10% down if possible to expand your options and lower your interest rate. In any case, shop around with a broker and local banks/lenders to see who can do what. Offerings will vary from bank to bank.

  8. Carol October 1, 2014 at 5:03 pm -

    Hello. We thought we were going to have a VA loan, but they denied us. We would like to try conventional. Can you tell me the best way to look for a conventional loan. We already have a loan through a bank, should we start with them since we have a good standing with them?
    Thank you,

  9. Colin Robertson October 1, 2014 at 5:49 pm -

    Hey Carol,

    Banks are okay, but vary in their quality of service, rates, and offerings. So it really depends on the bank in question. You could also try a broker who can shop your scenario around with multiple lenders to see where it’s the best fit. They can also help you with any snags you might run into. Alternatively, a credit union might also be a good avenue to try.

  10. Cathryn October 19, 2014 at 4:41 pm -

    Hi Colin,

    Thank you for this information! It has helped my husband and I have a better understanding as to which loan would suit our needs. Although, I am still confused with the PMI for FHA loans. We plan to put 20% down payment on a home – would we still have to pay the PMI for an FHA loan? I’m not sure what their PMI rules are, but I assume paying 20% down would eradicate the PMI payment over the life of the loan.

    Which loan would you consider best for those who take the 20% down payment route?

  11. Colin Robertson October 20, 2014 at 9:58 am -


    You still have to pay mortgage insurance on an FHA loan even if your LTV is 80% or less. So if you’ve got 20% to put down, a conventional loan should be the better deal because you won’t have to pay PMI every month (or upfront), even if the interest rate is slightly higher on the conventional loan. This is why the FHA has become a lot less popular. Shop around and you’ll see the difference in total payment.

    See the premium chart here:


  12. paul November 17, 2014 at 10:09 pm -

    Hi Colin,
    1st off thank you so much for sharing your knowledge and helping all of us. Our broker/lender qualify’s us for FHA of course with upfront & monthly PMI (around $260 per month) & interest at 3.375%….But we can maybe also qualify for conventional with slight higher 4.25% with no PMI for between 5 to 10% down…Which one works best? My thoughts are conventional but hopefully we qualify cuz I’m self employed….He has to go thru underwriting to make sure we can get conventional. I’d rather do conventional. He also, mentioned we can get out of PMI after 1 or 2 Yrs after having FHA thru refinance….is this true? Please advice us thank you, Colin.

  13. Colin Robertson November 18, 2014 at 10:06 am -

    Hey Paul,

    It really depends on the actual numbers and what you plan to do with the loan/property long term. Sure, you can always refinance out of the FHA, assuming you qualify for a conventional loan when that time comes. And that’s the rub…you say you’re self employed so will you be able to refi in the future without any issues? And will rates still be low at that time? Possibly yes, possibly no. Going with a loan you actually want to stick with has its benefits, assuming that’s your goal. But again, have him/her sit down and really go through the numbers to weigh the pros and cons. FHA is kind of disastrous at the moment because the mortgage insurance is generally in place for life now. Good luck!

  14. Adrienne January 5, 2015 at 8:53 pm -

    Hi Colin,
    My husband and I just passed the four year mark from a former foreclosure. We talked to a bank about the prospect of purchasing a new home. After a little research they gave us the news that we could get a mortgage, but it would have to be an FHA. The terms and conditions do not thrill us. Would we be eligible for a conventional loan after the seven years have passed and the foreclosure is off our credit?

  15. Colin Robertson January 5, 2015 at 9:08 pm -

    Hi Adrienne,

    FHA loans can be pretty expensive compared to conventional loans, but when it’s the only option, you often pay a premium. But do the math either way. The waiting period for conventional loans is generally seven years (3 years with extenuating circumstances), though there’s no absolute guarantee you’ll qualify for a mortgage unless everything else adds up, such as income, job, assets, credit score, and so forth. You may want to get a second (or third) opinion on your financing options.

  16. chuck January 8, 2015 at 9:41 pm -

    hello Colin,

    Really confused on which way to go conventional or FHA. We have great credit and have been approved for conventional already. We plan on putting 5% down on a 30 year note. Since the President has lowered the insurance on the FHA loans would it be even worth looking at?

  17. Colin Robertson January 9, 2015 at 12:51 pm -


    It’s always smart to take the time to compare loan options just in case one turns out to be a better deal for you. Not sure the reduced premiums will completely change the argument, but it’s probably worth a look if you’ve got the time. The problem is the mortgage insurance still stays in force for the life of the loan on FHA loans in most cases…

  18. Alex Bulgueroni January 13, 2015 at 1:58 am -

    Hi Colin,

    I have an existing FHA loan on my primary residence. I want to refinance (cash out) my property, and leave it at 80% LTV. Do I still have to pay mortgage insurance if I choose a FHA loan ? Should I get an conventional instead ?

  19. Colin Robertson January 13, 2015 at 11:00 am -

    Yes, all FHA loans have mortgage insurance requirements now. In the past, certain loans (less than or equal to 78% LTV and 15-year term) could avoid annual mortgage insurance, but not any longer. If you go conventional you won’t have to deal with mortgage insurance. So you may want to look at a conventional option, which might be a lot cheaper. Do the math to see what the best deal is for you.

  20. Elijah January 15, 2015 at 9:02 am -


    I hate to be redundant based on the questions you’ve already been asked above, but I wanted to further clarify. We are 5-years post foreclosure, and have more than 20% to put down. However, the foreclosure makes us only qualify for FHA loans. Would we have PMI for the life of the loan? The LTV criteria has been eradicated? Also, our broker is trying to talk us into the FHA saying that because our debt to income ratio is below 30% on the house we are buying, refinancing to a conventional loan in 24 months when the 7-year foreclosure timeframe has completely passed is going to be “very easy for us”. Do you think she’s being straightforward?

  21. Colin Robertson January 15, 2015 at 10:47 am -


    All FHA loans have mortgage insurance now, though not all have it for the life of the loan. Some only require it for 11 years, though most borrowers will have it for life because they put very little down. Many borrowers with FHA loans eventually refi to conventional loans to get rid of the mortgage insurance, and that’s sound logic. It just depends where interest rates are in two years and if you still qualify for a mortgage…you never know what circumstances may change. But if FHA is your only option, there’s not much else you can do.

  22. Alex Bulgueroni January 17, 2015 at 12:44 am -


    I just wanted to thank you for taking the time to answer all our questions. BIG aloha to you

  23. Colin Robertson January 17, 2015 at 10:59 am -

    Thanks Alex!

  24. Janice January 19, 2015 at 12:21 pm -


    I had the below information sent to me by a mortgage company regarding PMI. Can you verify this?

    “If you have an FHA loan, you need to contact me about the new rules going into effect January 26th. The new rule and rates being as low as they are, you could save hundreds a month and not have to pay for appraisal or increase what you owe. You’ll also get to skip a month of payments.”

    Thank you!

  25. Colin Robertson January 19, 2015 at 5:56 pm -


    The mortgage company is simply highlighting the fact that annual mortgage insurance premiums are being cut by 50 basis points and that interest rates are also low at the moment, so a refinance might lead to a lower monthly mortgage payment. Just be mindful that older FHA loans don’t require mortgage insurance for as long as more recent ones.


  26. jimmy January 23, 2015 at 9:18 am -


    I have FHA loan, the house was 180k and I down payment 19k with 4.7% interest. The owner of the house did pay the closing cost of 5k. Was it good that I went with FHA instead of conventional loan? This is a 30 year term.

  27. Colin Robertson January 24, 2015 at 11:54 am -


    I don’t know what the terms of a conventional loan would have been, so it’s impossible to tell you with certainty. It depends on your FICO score, when you took out the loan, what the PMI vs. MIP would be, how long you plan to hold the loan, etc.

  28. sandy January 29, 2015 at 2:42 pm -

    Hi! Love all the info on here!

    We were approved and passed through underwriting for an FHA 3.5% down on a 155,000 home purchase with 3% seller’s concession. However, we just failed the FHA appraisal due to septic distance from well (needs to be 50 feet, we are at 45 ft) . Our lender said only option is 5% conventional, or wait for the 3% conventional to pass down through corporate so they can offer it. Waiting for the 3% conv. is not an option since we are purchasing an unoccupied short sale. Soo my question is, we just received a revised gfe of 4.625% on our 5% conventional loan. Under the FHA it would have bee 4% even. Is this crazy high? Credit score has gone up 20 points since we first were approved, but lender said they do not run credit again? (score aprox 670). Any advice is appreciated, thanks!

  29. Colin Robertson January 29, 2015 at 5:22 pm -


    It’s possible that conventional rates can be .375% to .50% (or more) higher than FHA. Also if your mortgage insurance is lender-paid, that could explain a higher conventional rate as well because it’s built into the rate.

  30. Micaela February 6, 2015 at 3:29 pm -

    I’m interested in buy a house to live in (not rent out). I don’t have a set time frame to buy one I”m just now starting to look at what I need to learn. After reading your Blog and all the Q&A, I can tell I have a LOT to learn.

    Can you recommend any reading material? I know absolutely nothing about restate/buying a home. I feel like this topic is over my head.

    With the market the way it is and a lot of uncertainty in houses and as well as everyone thinking about the next bubble, finding books on this topic during this time frame is not an easy task.

    Thank you Colin

  31. Cris February 6, 2015 at 3:33 pm -

    Hello…I was under the impression that conventional loan the payment can fluctuate from month to month? So after reading all this I guess I was misinformed. Thank you for the info.

  32. Colin Robertson February 6, 2015 at 9:29 pm -

    Hi Micaela,

    First off, I’m glad you’re taking the time to research and learn. That alone is huge and something many individuals don’t bother to do. I wouldn’t say there’s one single resource that has all the answers…just visiting blogs like mine over time will help you better understand the real estate world. And staying up on the news as much as possible. Oh and Zillow just released a book actually, so that might be a good read. Lastly, you know your own neighborhood best. Within your desired area, single out the good parts, then look at the pros and cons of the property, where it’s located, the school district, the property history, etc. And if prices seem outrageous, they probably are. If it’s cheaper to buy than rent, you might be on to something, especially if you love the home. Good luck!

  33. Colin Robertson February 9, 2015 at 1:08 pm -


    It can if it’s a monthly adjustable-rate mortgage.

  34. Matt February 17, 2015 at 8:46 am -

    My wife and I have a Conventional Mortgage that we’ve been paying into for about 8 years. We’re underwater on our mortgage and have tried numerous times to refinance to save money but had no luck. We are running out of room in our growing family and would like to move but are stuck in our condo. We had thought about renting but it’ll be hard to find someone to cover the amount we pay each month on the mortgage/association. Do you have any suggestions?

  35. Colin Robertson February 17, 2015 at 10:06 am -


    Maybe a broker could help you weigh all your options…they work with a bunch of banks and often know of many different programs that might work. Other than that there is the potential your home’s value isn’t as far off as it used to be, which could open some doors.

  36. jose March 2, 2015 at 8:34 pm -

    Hi I was on short sale January 2012, 3 years ago. Can I get a conventional loan mortgage my credit score is 712 now, also can put 20% down.

  37. Colin Robertson March 3, 2015 at 11:03 am -


    Fannie and Freddie have a two year waiting period if there were extenuating circumstances, otherwise it is four years.

  38. Diane March 4, 2015 at 10:18 am -


    I love reading your answers to the postings on here.
    M situation is I currently have a 1st and a 2nd mortgage on my primary home. My 1st is $151,000 at 4.625 (Conventional loan) and my 2nd (home Equity loan) is $56,000 at 6%. Comps in my area have been selling for up to $280,000. I had to do a short sale on a rental property in 1/2012 due to the renter totally destroying the property making it impossible to fix up and rent again or to sell for the value. I am trying to refinance my primary home now to roll both loans together with a cash out of $10,000 to do some home improvements. My credit score is 649. What is my best option? I have been offered an FHA at 3.25% (paying 1 point) with $12,000 cash out and the settlement costs would be $14,000, making the new loan $235,000 versus $208,000 currently. Should I wait until 1/2016 and do a conventional or take the offer of the FHA at 3.25?

    Reading these posts and your comments have been a huge help.

  39. Colin Robertson March 4, 2015 at 11:12 am -


    The downside, as I’m sure you know, are the MIPs on FHA loans, both upfront and monthly, and for the life of the loan now. At least they recently slashed the upfront one. The upside is that the 3.25% rate is likely much better than the rate you’d probably receive for a conventional loan. And who knows where conventional rates will be in a year. Sure, they could be the same or lower, but they could also be 5% or higher. Do the math and that might help you weigh the pros and cons of taking the FHA loan now or waiting another year.

  40. nary March 5, 2015 at 9:30 pm -

    Hi Colin,
    I am trying to refinance my house. I can’t decide to go with FHA for lower rate 3.5% or conventional loan with higher 4.25% but with no PMI. Which one is best?

  41. deb March 6, 2015 at 11:43 am -

    If I have a sales price of $400,000 and the maximum mortgage in my county is 271050 can the seller carry back a second for the difference

  42. Colin Robertson March 6, 2015 at 6:23 pm -


    If the seller and lender permits it…there’s also the possibility of a piggyback second mortgage with an actual lender. A broker can probably help you navigate potential options.

  43. Colin Robertson March 10, 2015 at 7:50 pm -


    It depends on the cost really, and how long you plan to keep the loan. You’ve really got to do the math to figure that out.

  44. mae March 11, 2015 at 4:53 am -

    stumbled upon this website after searching the pros and cons between fha loan and conventional loan and this article helps a lot in understanding it.

    thank you

  45. Nancy March 22, 2015 at 5:27 pm -

    I am looking at purchasing a home and would like to know if there are requiremets regarding commuting to work distance from your home. Are there requirements for this for FHA and/or conventional loans?

  46. Alex March 22, 2015 at 9:58 pm -

    Hello i want to refinance my house because my interest rated is at 6.5 percent the only loan i qualify is the FHA loan . House payment is 1400 paying only interest nothing to principal and with the FHA loan my payment would drop like $50 .. The only thing is that i dont want to pay the extra insurance for 30 yrs i dont know if its a good plan to go with the FHA loan…

  47. Colin Robertson March 23, 2015 at 5:02 pm -


    You could potentially refinance to FHA then refinance out of FHA later to remove the insurance if you become eligible for other types of loans in the future, but the savings need to be good enough to make sense.

  48. Colin Robertson March 23, 2015 at 5:08 pm -


    If it’s far the underwriter might ask for an explanation.

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