As we’ve discussed earlier, both Conventional Mortgages and FHA Loans help us buy a home through a loan. We make a down payment, and repay the loan principal, interest, etc through monthly payments. But what are the differences between them?
The main difference is in terms of credit score and minimum down payment requirements. You can qualify for an FHA loan with a credit score as low as 500, whereas you usually need a credit score of 620 or more for a conventional mortgage. The down payment required for an FHA loan could be as low as 3.5%, but it is usually 20% for traditional mortgages. For an FHA loan, you can use money received as a gift from someone else for the down payment, which is not always allowed with a conventional mortgage.
Are there any other differences between FHA Loans and Traditional Mortgages?
FHA loans are insured by the Federal Housing Administration, and you are required to pay an upfront as well as annual mortgage insurance premium. This is not the case with conventional mortgages. FHA loans have an upper limit on how much you can borrow based on the region, and strict limitations based on your income and other debt you have. These restrictions are usually less strict for traditional mortgages.
Wow, that’s a lot of differences!!
Wait, there’s more! Conventional mortgages can be taken for a primary residence as well as investment or rental property, whereas FHA loans are available only for a primary residence. Conventional mortgages can be fixed or floating, and are available for 5 to 30 years, whereas FHA loans are fixed rate only, and are available for 15 or 30 years.
So, are FHA Loans better than Conventional Mortgages, or the other way round?
One is not necessarily better than the other – it depends on your situation. If you have a low credit score, have saved less for the down payment and the home meets FHA requirements, an FHA loan is right for you. But if you are buying a home that doesn’t meet FHA requirements, is more expensive than the upper limit for FHA loans, or if you have a good credit score and have saved up for a 20% down payment; a conventional mortgage is the right choice.
Podcast: FHA Loan vs Conventional Mortgage
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. That’s what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
A comparison between an FHA Loan and a Conventional Mortgage: The similarities and differences between the two, and whether FHA Loans are better than Conventional Mortgages or the other way round.
Show notes and transcript at: https://www.easypeasyfinance.com/comparison-fha-loan-vs-conventional-mortgage/
