What is the Difference Between FHA loans and Conventional Mortgages?

What is the Difference Between FHA loans and Conventional Mortgages?

July 11th, 2018 | FHA Loans, Government Loans, Conventional Loans, Purchasing a Home

If you are just getting started in the home buying process, you have probably come across several different types of mortgage loans as you have researched your options. Two of the most common home loan types are conventional and FHA mortgages. What are the differences between them and when does each make the most sense?

FHA Loans

FHA, or Federal Housing Administration, loans are a government-insurance program that makes it easier for Americans without great credit or large down payments to become homeowners. When a borrower is approved for an FHA loan with an approved lender, the federal government - through the FHA - insures the lender against losses associated with that loan. This program is especially popular with first-time homebuyers.

Conventional Mortgages

A conventional loan is a traditional loan, typically requiring higher down payments and better credit scores. If borrowers do not provide a full 20% down payment, they must take on private mortgage insurance to reduce the lenders’ risk of loss.

The Comparison

Down Payments - Conventional loans will require down payments of anywhere from 5% to 20% while FHA mortgages will permit down payments as low as 3.5%.

Credit Scores - In order to qualify for a conventional mortgage, most borrowers must have a FICO score of at least 620 but FHA borrowers can have scores as low as 580.

Interest Rates - Mortgage interest rates will generally be slightly higher on a conventional than an FHA loan but the difference in rate is not usually enough to make a huge impact.

Insurance - For either type of mortgage, if the borrower does not put down a full 20%, monthly mortgage insurance will be required. The way insurance operates for each  is different though. For conventional loans, borrowers will pay a monthly private mortgage insurance (PMI) until their equity reaches 20% of the loan value. For FHA loans, borrowers must pay a 1.75% upfront mortgage insurance premium at closing, no matter how large the down payment. The borrower must also continue to pay monthly insurance premiums for the entire life of the loan if the down payment is less than 10%. If the down payment was more than that, the mortgage insurance can be canceled after 11 years.

Debt-to-Income Ratios - FHA loans are usually more available to those with higher debt-to-income ratios than are conventional loans. Lower debt is still always better for best loan terms though.

Red Tape - There are generally more restrictions associated with FHA loans than conventional.  FHA loans require borrowers to occupy the purchased properties, meet certain property standards, and come in under specific loan limits.  

An FHA mortgage may be best for you if you don’t have a large down payment, have a lower credit score, or if you do not plan to stay in the home for more than a few years. Otherwise, a conventional loan may save you the most money in the long run. A mortgage professional can help you sort out which is the best choice in your situation.

Are you looking for a mortgage in California? If so, contact Holmgren and Associates at 510-339-2121 today and we can go over the best mortgage options for you.


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Holmgren and Associates

DBA of Finance of America
4200 Broadway
Oakland, California 94611
Phone: 510-339-2121
NMLS 0910184/1071

Holmgren & Associates is a branch of Finance of America. We are a full service mortgage banker with an experienced staff offering expertise in residential mortgage lending, with primary focus on loans for home purchase, refinance, and reverse mortgages.

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©2019 Holmgren & Associates is a division of Finance of America Mortgage LLC |Equal Housing Opportunity | NMLS ID #1071 (| 300 Welsh Road, Building 5, Horsham, PA 19044 | (800) 355-5698 | Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act
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This is not a commitment to lend. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states.  Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision.  Any materials were not provided by HUD or FHA. It has not been approved by FHA or any Government Agency.  A preapproval is not a loan approval, rate lock, guarantee or commitment to lend. An underwriter must review and approve a complete loan application after you are preapproved in order to obtain financing.  Questions, comments, concerns? Send to