Conventional vs. FHA: Which mortgage is right for you?

If you’re a first-time homebuyer, all the mortgage lingo and terminology can be difficult to decipher. Even if you’re not a first-time buyer, it can still seem like your lender is speaking to you in a different language. For example, what exactly does it mean to have a “conventional loan” or an “FHA” loan? How are they different from each other, and which one is right for you?

It depends. Each loan has pros and cons, depending on your situation. 

An FHA loan is one that is insured by the government (the Federal Housing Agency to be specific.) While it is backed by the government, it is issued through approved lenders, like us. An FHA loan has a less restrictive credit qualification process and buyers are only required to put 3.5% down on the home. The FHA loan is great for first-time buyers who want to purchase a primary residence, have little equity for a downpayment, and might have less than perfect credit.

A conventional loan, on the other hand, is not backed by the government and is insured by private lenders. Conventional mortgages are the most popular type of mortgage but are harder to qualify for than an FHA loan. Qualifying borrowers will need a higher credit score and a more favorable debt-to-income ratio (the amount of debt you have compared to your income) compared to buyers qualifying for an FHA loan. Some lenders, like us, allow for as little as 3% down on a conventional loan. A conventional loan is great for buyers with good credit, or for buyers who want to purchase a second home or investment property.

Credit
As mentioned earlier, FHA loans are good for borrowers with poor to average credit. Those with above-average credit may want to look into a conventional loan. Typically speaking, the better your credit, the better your rate will be on a conventional loan. 

On the other hand, if you have poor to average credit, an FHA loan will likely cost you less money than a conventional loan.  

Loan Limits
Both Conventional and FHA mortgages limit the amount that the buyer can borrow. You can still purchase a home that exceeds the loan limit, however, you will need to foot the difference with a down payment.

The 2020 FHA loan limit ranges between $331,760 and $765,600, depending on where you live. High-cost areas will have a higher loan limit than low-cost areas.  

The 2020 Conventional loan limit is $510,400, and up to $765,600 in some high-cost areas.

Private Mortgage Insurance 
Private Mortgage Insurance (PMI) is a type of insurance the protects the lender if you stop paying your loan. PMI is always required for an FHA loan.

PMI is also required on conventional loans when putting less than 20% down on the house. In most cases, borrowers will pay the mortgage insurance in the form of a monthly premium, although in some cases PMI can be paid for upfront.

On a conventional loan, the PMI can be lifted once you reach 22% equity in your home. However, on an FHA loan, the borrower must refinance the loan to eliminate the PMI.

While conventional loans and FHA loans can differ, both can be great products depending on your current situation. Speak with your local lender for a no-obligation assessment of which loan is right for you. 

The information contained herein (including but not limited to any description of TowneBank Mortgage, its affiliates and its lending programs and products, eligibility criteria, interest rates, fees, and all other loan terms) is subject to change without notice. This is not a commitment to lend.