Conventional and FHA Loans: Which is Best?

While the list of options seems to be shrinking for mortgage customers, understanding the differences between two of the major programs, Conventional and FHA, and when you might want to use each, should help to make you a more informed consumer.  Each has its benefits and drawbacks.

Borrowers that have good credit, some money in the bank, and some equity in their homes, are most likely suited to having a Conventional loan, meaning a loan that falls into either Fannie Mae of Freddie Mac guidelines.

Benefits to Conventional Loans

One benefit to having a Conventional loan is that there is neither an upfront mortgage insurance premium that FHA charges, which is typically 1.5% of the loan amount, nor the monthly mortgage insurance premium.

The total debt to income ratio for Conventional loans is near 65%, depending on other factors per Fannie Mae and Freddie Mac guidelines, versus around 43% for FHA.

This means that you could make less money and get the same loan amount with a Conventional loan than you would with FHA.

While there are still some no-income-verified Conventional programs available, FHA is always full documentation.

Benefits to FHA Loans

Looking at the credit side of this comparison, Conventional borrowers will need a credit score of at least 620 to qualify, and will be charged a premium, based on how close their score is to 620.  FHA borrowers can in many cases be lower than 620, but another benefit to having FHA versus Conventional is the amount of vested interest a borrower has in a property.

FHA lenders will allow borrowers to make as little as a 3% contribution to the transaction; and this contribution can go toward expenses such as closing costs.  Conventional lenders usually want borrowers a bit more vested.