Conventional Versus FHA Loans: Which Is Best for You in 2024?
When purchasing a house, selecting the appropriate mortgage is a significant choice. The two most popular mortgage options are conventional loans and FHA loans. If you’re a first-time homebuyer or trying to figure out the best way to finance a new home, you’re probably asking: Which loan is best for me—conventional or FHA?
The answer depends on your financial situation and goals. In this guide, we’ll compare conventional versus FHA loans, breaking down the key differences so you can make the best decision for your home purchase in 2024.
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Conventional Versus FHA Loans: What’s the Difference?
The main difference between conventional and FHA loans is where they come from and who insures them. Private lenders back conventional loans, which do not have government agency insurance. These loans follow the criteria set by Fannie Mae and Freddie Mac. On the other hand, FHA loans are backed by the Federal Housing Administration, so they’re more forgiving on credit scores and down payments.
But which one is right for you? Let’s dive deeper into the benefits of conventional versus FHA loans.
Why Some Borrowers Choose Conventional Loans Over FHA Loans
One of the main reasons borrowers choose conventional loans over FHA loans is to avoid paying the high mortgage insurance premiums (MIP) that come with FHA loans. The initial MIP for FHA loans is 1.75% of the loan amount, and borrowers must also make a monthly mortgage insurance payment of 0.85% of the loan balance. This is required even if you put a minimum of 3.5% on an FHA loan.
With conventional loans, there’s no upfront mortgage insurance premium, and you only have to pay for private mortgage insurance (PMI) if your down payment is less than 20%. Plus, PMI goes away once you’ve paid off enough of your loan to bring the loan-to-value (LTV) ratio to 80%.
In other words, with a conventional loan, you can eliminate mortgage insurance sooner, which saves you money in the long run.
Updates on Mortgage Insurance in 2024: FHA vs. Conventional Loans
As of 2024, FHA loans still require a mandatory mortgage insurance premium for the life of the loan. If you choose a 30-year FHA loan, you will need to make monthly mortgage insurance payments throughout the entire loan term unless you decide to switch to a conventional loan through refinancing. Even if you pay your loan significantly, you’re still stuck with the MIP.
Once you achieve 20% equity in your home, private mortgage insurance (PMI) on conventional loans can be terminated. To remove PMI, you can request a home appraisal to show the lender that your home value has risen or that you’ve paid down enough of your loan to meet the 80% LTV requirement.
In 2024, FHA’s mortgage insurance remains at 0.85% of the loan amount annually. PMI on conventional loans is based on your credit score and LTV ratio. Remember that the lower your PMI payments, the higher your credit score and the more money you put down.
Down Payment Requirements: Conventional vs. FHA Loans
Another important difference when comparing conventional versus FHA loans is the down payment. Conventional loans allow first-time homebuyers to qualify with just a 3% down payment. To be classified as a first-time buyer, you must not have owned a primary residence in the past three years.
The down payment on a conventional loan is typically 5% for non-first-time homebuyers. To completely bypass PMI, you must submit a down payment of 20%.
FHA loans, however, require a 3.5% minimum down payment for borrowers with 580 credit scores or higher. If your credit score is below 580, you must put down at least 10% to qualify for an FHA loan.
Mortgage Insurance on Conventional Loans vs. FHA Loans in 2024
If you plan to make less than a 20% down payment, you’ll need to consider mortgage insurance, whether you choose an FHA loan or a conventional loan. Here’s a quick breakdown of how mortgage insurance works for each option:
- FHA Loans: The loan necessitates an initial mortgage insurance premium of 1.75% and an ongoing annual mortgage insurance premium of 0.85% for the duration of the loan.
- Conventional Loans: Private mortgage insurance (PMI) is required only if your down payment is less than 20%. The good news is that PMI can be canceled once you reach 20% equity, either through paying down your loan or by increasing your home’s value.
This makes conventional loans more attractive for buyers who can’t put down 20% but expect to build equity quickly or plan to refinance.
Loan Limits for FHA and Conventional Loans
When deciding between an FHA and a conventional loan, the maximum loan amounts also play a role in the decision. Conventional loans typically have higher loan limits, while FHA loans have stricter limits depending on where you live.
As of 2024, the loan limit for conventional loans is $726,200 in most parts of the country, but it’s higher in high-cost areas like California. FHA loan limits differ by county but typically fall within $472,030 to $1,089,300 in high-cost areas.
If you’re buying in an expensive market and need a higher loan amount, a conventional loan may be the better option.
Debt-to-Income Ratio (DTI) Guidelines for FHA and Conventional Loans
One of the most important factors lenders consider when approving a mortgage is your debt-to-income (DTI) ratio. The percentage of your monthly earnings that is allocated to paying off debts, such as your mortgage, is referred to as the debt-to-income ratio.
In general, conventional loans have stricter DTI limits than FHA loans. Most conventional loans cap the DTI at 50%, meaning your total monthly debt payments can’t exceed 50% of your gross monthly income.
FHA loans offer greater flexibility, permitting a back-end DTI ratio of up to 56.9% and a front-end DTI ratio of up to 46.9% for individuals with credit scores of 620 or above. If your credit score falls below 620, the typical DTI limit is 43%.
Credit Score Requirements: Conventional vs. FHA Loans
The lowest credit score needed for conventional loans is 620. Individuals with credit scores of 740 or more are eligible for the most favorable interest rates. FHA loans have specific credit score criteria.
FHA loans offer lenient credit score requirements. If you provide a 3.5% down, you can qualify for an FHA loan with a 580 credit score. To be eligible with a credit score between 500 and 579, a 10% down payment is necessary.
This flexibility makes FHA loans a great option for borrowers with lower credit scores or those with less money saved for a down payment.
Pros and Cons of Conventional Loans in 2024
The primary advantages and disadvantages of opting for a traditional loan in 2024 are as follows:
Pros of Conventional Loans:
- Lower long-term costs: PMI can be canceled once you reach 20% equity.
- Higher loan limits: Ideal for homebuyers in higher-priced markets.
- Flexible property types: Conventional loans are suitable for primary, secondary, and investment properties.
- Better terms for high-credit borrowers: If you have a credit score over 740, you’ll likely get a better interest rate on a conventional loan than an FHA loan.
Cons of Conventional Loans:
- Higher credit score requirements: You need at least a 620 score; the best rates are for scores above 740.
- Stricter DTI limits: Conventional loans typically require a DTI below 50%.
Pros and Cons of FHA Loans in 2024
In 2024, let’s consider the primary advantages and disadvantages of opting for an FHA loan:
Pros of FHA Loans:
- Lenient credit requirements: Borrowers with credit scores of 500 or higher are eligible.
- Flexible DTI guidelines: FHA loans make it easier for borrowers with higher debt to qualify by allowing for higher DTI ratios.
- Low down payment: You can qualify for an FHA loan with a 3.5% down payment if your credit score is 580 or higher.
Cons of FHA Loans:
- Lifetime mortgage insurance: You’ll have to pay MIP for the life of the loan unless you refinance into a conventional loan.
- Lower loan limits: FHA loans have lower limits, which could be problematic in high-cost areas.
So, Which Is Better: Conventional or FHA Loans?
Choosing between conventional versus FHA loans comes down to your personal situation. If you have a strong credit score and can put down at least 20%, a conventional loan may be the better choice because you can avoid PMI and enjoy lower long-term costs.
On the other hand, if your credit score is lower or you don’t have a large down payment saved, an FHA loan offers more flexibility and can help you qualify for a mortgage, even if you have a higher DTI or less-than-perfect credit.
How to Decide Between FHA and Conventional Loans in 2024
- First-time homebuyer? If you’re a first-time buyer with a limited down payment, conventional loans (with a 3% down payment) and FHA loans (with a 3.5% down payment) are great options. However, an FHA loan may be the better fit if your credit score is lower.
- Looking to buy in a high-cost area? Conventional loans typically offer higher loan limits, making them the better option for expensive markets.
- Concerned about mortgage insurance? If you can provide a 20% down payment on a conventional loan, you can completely bypass PMI. However, with FHA loans, you must have mortgage insurance for the entire duration of the loan.
Final Thoughts: Conventional vs. FHA Loans in 2024
When comparing conventional versus FHA loans in 2024, remember that your credit score, down payment, and financial goals play a big role in determining which loan is right for you. Conventional loans offer lower long-term costs and higher loan limits.
In contrast, FHA loans are more flexible for borrowers with lower credit scores or higher DTI ratios. Ultimately, both loan options can help you buy or refinance your home—you must choose the one that best fits your financial situation.
If you’re still unsure which loan is right, contact a trusted mortgage broker or lender like Non-QM Mortgage Lenders. We can help you explore your options, run the numbers, and find the perfect loan for your home purchase in 2024. Ready to get started? Contact us today!
Frequently Asked Questions About Conventional Versus FHA Loans:
Q: What is the main difference between conventional versus FHA loans?
A: The main difference between conventional and FHA loans is that conventional loans are not backed by the government, while FHA loans are insured by the Federal Housing Administration. This makes FHA loans more flexible for borrowers with lower credit scores or smaller down payments.
Q: Which loan has a lower down payment requirement, conventional or FHA loans?
A: FHA loans usually require a lower down payment of 3.5% for borrowers with credit scores of 580 or higher. Conventional loans can go as low as 3% for first-time homebuyers, but you’ll need to put down 20% if you want to avoid mortgage insurance.
Q: Do FHA loans or conventional loans have stricter credit score requirements?
A: The credit score prerequisites for conventional and FHA loans vary. Conventional loans generally necessitate a minimum credit score of 620. In contrast, FHA loans allow individuals with as low as 500 credit scores (with a higher down payment).
Q: Which loan has better mortgage insurance options, conventional versus FHA loans?
A: Once you have attained 20% equity in your home, it is possible to cancel mortgage insurance for conventional loans. However, for FHA loans, mortgage insurance is required for the duration of the loan unless you opt to refinance into a conventional loan.
Q: Is qualifying for conventional versus FHA loans easier if I have a lot of debt?
A: FHA loans are more lenient with debt-to-income (DTI) ratios, allowing up to 56.9% DTI, whereas conventional loans usually cap DTI at 50%. FHA loans may be easier to qualify for if you have higher debt.
Q: Can I avoid paying mortgage insurance with an FHA loan like a conventional loan?
A: No, FHA loans require mortgage insurance for the entire life of the loan, unlike conventional loans, where mortgage insurance (PMI) can be canceled once you’ve paid down enough of the loan to reach 20% equity.
Q: Which loan has higher loan limits, conventional or FHA loans?
A: Conventional loans generally have higher loan limits than FHA loans, making them more attractive for homebuyers in high-cost areas.
Q: Are FHA loans or conventional loans better for first-time homebuyers?
A: First-time homebuyers may prefer FHA loans because of the flexible credit score requirements and low down payment options. However, conventional loans may offer lower long-term costs if you qualify with a higher credit score and a larger down payment.
Q: Do conventional versus FHA loans have different approval timelines?
A: The approval timelines for both conventional and FHA loans can be similar. Still, the exact process may differ depending on the lender and your financial situation. FHA loans might have a lengthier timeline because of the extra government-related documentation.
Q: Which loan is better in 2024, conventional versus FHA loans?
A: Whether you opt for conventional or FHA loans depends on your credit score, down payment, and financial objectives. Conventional loans might provide lower overall expenses, whereas FHA loans are more suitable for individuals with lower credit scores or smaller down payments.
This blog about “Conventional Versus FHA Loans Which Do I Choose?” was updated on October 7th, 2024.