Conventional Mortgage Loans vs. FHA Loans: What’s the Difference?

As a homebuyer, choosing the right mortgage is one of the most important steps in the purchasing process. But with so many different types of mortgage loans, it can be difficult to know which is best for you. Each mortgage loan comes with different benefits and qualifications, and the type of loan you choose will depend on the home you want to purchase, your personal financial situation, and your long-term goals. If you’re in the market for a home, here’s a closer look at the difference between two of the most common types of mortgage loans: conventional and FHA loans.

Conventional Loans

Conventional loans are by far the most popular type of mortgage for homebuyers in recent years. According to the U.S. Census Bureau, over 70% of new home purchases in 2018 were financed by conventional mortgages. Unlike FHA, USDA, or VA loans, conventional loans are not guaranteed or insured by the government. In general, conventional mortgage loans come with fixed terms and interest rates and may take less time to process than government-backed financing options.

Conventional mortgages may be conforming or non-conforming. Conforming loans are those that conform to the qualifying standards set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Conforming loans have credit score based pricing and require down payments of at least 3%. A non-conforming loan is any loan not secured by Fannie Mae or Freddie Mac. Because they have stricter qualifying criteria, conventional loans are usually the best option for borrowers with good or excellent credit, who are also able to make a sizeable down payment on a home.

FHA Loans

FHA loans have less strict qualification standards than conventional loans, making it easier for borrowers with high debt-to-income ratios and lower credit scores to qualify. FHA loans are insured by the Federal Housing Authority, which is part of the U.S. Department of Housing and Urban Development. FHA loans were designed to make homeownership accessible for more people, especially for first-time homebuyers.

With lower credit requirements, FHA loans are ideal for homebuyers with imperfect credit scores. Borrowers can often qualify for loans with credit scores of 580 or even lower. Down payments requirements for FHA loans are also less than conventional loans, with a minimum down payment of only 3.5 percent. And in most cases, FHA interest rates are lower than conventional loans.

FHA loans also require private mortgage insurance premiums, meaning you’ll pay an up-front mortgage premium at closing and a monthly premium with your mortgage payment. Private mortgage insurance is also required for conventional loans with a down payment of less than 20 percent.

If you’re wondering what type of loan is best for your situation, River City Mortgage is here to help you! Our experienced, licensed loan officers will walk you through your financing options to help you find the loan that suits your needs and goals. We understand how stressful buying a home can be, which is why we strive to make the mortgage process as smooth as possible for you and your family. Contact us to learn more and get started today.



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