Our evaluations and opinions are not influenced by our advertising relationships, but we may earn a commission from our partners’ links. This content is created by TIME Stamped, under TIME’s direction and produced in accordance with TIME’s editorial guidelines and overseen by TIME’s editorial staff. Learn more about it.
If you’re getting ready to purchase a home, you likely have a lot on your to-do list. For most people, one of those things is applying for a mortgage. Homebuyers typically choose either a conventional loan or a Federal Housing Administration (FHA) loan.
Before deciding on which type of home loan is right for you, it’s essential to understand how each works. Knowing their benefits and drawbacks can help you make a more informed decision. The mortgage you choose will significantly impact your interest rate, qualification requirements, and how much you can afford.
Keep reading as we compare conventional loans to FHA loans to help you decide which is the best fit for you.
| Conventional Loan | FHA Loan | |
|---|---|---|
Credit score | 620 or higher | 580 or higher |
Down payment | As low as 3% | As low as 3.5% |
Debt-to-income ratio | 50% or less | 57% or less |
Mortgage insurance | Required if the down payment is less than 20% | Required for all loan amounts |
Loan limits | $766,550 for most areas and $1,149,825 in high-priced markets | $498,257 for most areas and $1,149,825 in high-priced markets |
Conventional loans are home loans issued by private lenders. These loans aren’t backed by government agencies such as the FHA, United States Department of Veteran Affairs (VA), or the United States Department of Agriculture (USDA).
Conventional loans are usually less costly than government-backed ones but have tighter lending requirements. Borrowers require a higher credit score and a lower debt-to-income ratio, making them more challenging to obtain for anyone with a less than ideal credit history.
Conventional loans come in two different forms—conforming and non-conforming loans.
Conforming loans meet standards set by Fannie Mae and Freddie Mac, which means you’ll receive several consumer protections. However, conforming loans can’t exceed specific loan amounts. In 2024, the loan limits are $766,550 for most areas of the country and $1,149,825 in certain high-priced markets.
On the other hand, non-conforming loans don’t meet the standards set by Fannie Mae and Freddie Mac and don't have the same protections for borrowers. Jumbo loans are a type of non-conforming loan. These loans allow borrowers to access loan amounts greater than you could with a conforming loan.
Before deciding on a conventional loan, weighing the pros and cons is essential.
Unlike conventional loans, which are offered through a private lender with no government backing, FHA loans are secured by the Federal Housing Administration. These non-conforming loans allow borrowers to avoid the same lending requirements as conventional loans.
So what does this mean? FHA loans can be an excellent option for someone with a lower credit score and a small down payment. Plus, because the U.S. government shares the risk, lenders are typically willing to offer lower interest rates to qualified borrowers.
A few pros and cons should be considered when considering an FHA loan.
Many mortgage lenders offer both conventional and FHA loans.The application process is roughly the same except for the qualifications. Where things start to differ is with the appraisal. Because the federal government backs an FHA loan, the appraisal is typically more in-depth. They want to ensure the home meets certain occupancy criteria before the FHA loan is approved.
Areas of focus include the electrical and HVAC systems to ensure they work properly. The appraiser will also look for things like stair railings being up to code, an appropriate number of smoke and carbon monoxide detectors—even peeling paint that could contain lead. If there are red flags found during the appraisal, your loan could be denied until the issues are fixed.
Purchasing a new home is an exciting time. Unfortunately, the mortgage process can be confusing and stressful. By understanding the difference between a conventional loan and an FHA loan, you can get a mortgage that best matches your needs and financial situation.
If you have a lower credit score or a smaller down payment but still want to own a home, an FHA loan is a great option. However, a conventional loan would make more sense if you have a strong credit history and can put down 20% or more.
The biggest downside to a conventional loan is that they’re generally not available to individuals with a lower credit score and a small down payment.
Because FHA loans are known to have a more in-depth appraisal process, many sellers and their agents prefer to work with buyers using conventional loans.
No. Well-qualified borrowers can get a conventional loan with as little as 3% down. However, if your down payment is less than 20%, you’ll be required to have mortgage insurance.
The information presented here is created by TIME Stamped and overseen by TIME editorial staff. To learn more, see our About Us page.
