FHA vs. Conventional Loans: What’s the Difference? | Capital One (2024)

FAQs

FHA vs. Conventional Loans: What’s the Difference? | Capital One? ›

It's generally easier to qualify for an FHA loan compared to a conventional loan. Depending on the size of the down payment, a borrower needs a credit score of either 500 or 580 to get an FHA loan. Conforming conventional loans require a score of at least 620.

If you're a first-time buyer or someone with a weaker credit score, then an FHA mortgage loan can be easier to qualify for. However, if you can put 20% or more toward a down payment and want to look a bit stronger to prospective sellers, then a conventional loan may be your best bet,” says Channel.

FHA loans require borrowers to pay mortgage insurance premiums (MIPs) at closing and throughout the life of the loan. Specifically, you'll pay 1.75% of the loan amount at closing as your upfront MIP. Then, you'll pay MIPs of 0.15% to 0.75% of the loan amount every year.

FHA mortgage insurance will increase your payments and the overall cost of the loan, even if the base rate is lower than for other loan types.

One of the top reasons for why some sellers opt for conventional mortgages is because they routinely require a higher credit score than FHA mortgages. With this type of loan, lenders are more likely to approve buyers with higher credit ratings who often have more capital available to put down on a home.

Lack Of Earnest Money And Down Payment

Unfortunately, the typical home buyer using an FHA loan is unlikely to have excess cash upfront. If a home buyer has less cash to put toward a down payment, they may be less likely to be approved for a mortgage, depending on the state of their finances.

Down payment: While 20 percent down is the standard, many fixed-rate conventional loans for a primary residence allow for a down payment as small as 3 percent or 5 percent. Private mortgage insurance (PMI): If you put down less than 20 percent, you'll have to pay PMI, an additional fee added to your payments.

FHA Loan: Cons

Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.

Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.

Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.

How much income is too much for an FHA loan? ›

There's also no maximum income requirement for an FHA loan, so you don't have to worry about earning too much to qualify. These loans are ideal for those who want a lower down payment, and for those with lower credit scores.

Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.

Key takeaways. FHA loans require a minimum 3.5 percent down payment for borrowers with a credit score of 580 or more. Borrowers with a credit score of 500 to 579 need to put 10 percent down to get an FHA loan.

FHA loans are generally easier to qualify for because of their lower credit score and DTI requirements. While conventional loans may not require mortgage insurance with a large enough down payment, FHA loans come with mandatory mortgage insurance premiums.

Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.

Borrowers pay an average of $7,402 in closing costs when taking out FHA loans. If you get a conventional mortgage, you'll only pay, on average, about $3,745 in closing costs. FHA loans also have higher down payment requirements.

Mortgage lenders can approve conventional loans without the typical delays incurred with FHA or government-backed loans. Also, with a conventional loan, sellers do not face an exhaustive FHA inspection, which sometimes then requires time-consuming repairs. Conventional loans come in all different types and sizes.

The above notwithstanding, FHA and conventional appraisals, in their basic valuation methodology, are generally the same.

These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.