Conventional vs. FHA loans: Pros and Cons

The most common type of mortgage is the conventional loan. A conventional loan is any mortgage not insured by a government agency. 

The pros of a conventional mortgage

Lower down payments: Depending on your credit score, you might qualify for a conventional mortgage loan that requires a down payment of just 3% of your home’s purchase price. If you are buying a home costing $300,000, that comes out to a down payment of $9,000. 

You can use a conventional loan to buy an investment property: You can use a conventional mortgage to purchase an investment property, something that you can’t always do with government-insured mortgages. 

Private mortgage insurance doesn’t last forever: If you come up with a down payment of less than 20% of your home’s purchase price, you’ll need to pay for private mortgage insurance or PMI. This insurance protects your lender if you miss your mortgage payments and usually equals 0.03% to 0.07% of your average outstanding loan balance each year, according to Freddie Mac. 

This insurance doesn't last forever, though: Once you've built 20% equity in your home, you can request that your lender cancel PMI. Your PMI payments automatically disappear when your mortgage loan balance drops to 78% of your home's original property value.

The cons of a conventional loan

Higher credit scores required: You’ll typically need a FICO credit score of at least 620 to qualify for a conventional mortgage. 

Past mistakes hurt more: If you’ve declared bankruptcy or gone through a foreclosure, you’ll have to wait longer to apply for a conventional mortgage than you would if you were applying for a government-insured loan. You’ll need to wait two to four years if you’ve declared bankruptcy and three to seven if you’ve gone through foreclosure.

An FHA loan is one insured by the Federal Housing Administration. 

The pros of an FHA loan

Easier to qualify for: One of the goals of FHA loans is to allow borrowers who might struggle to qualify for a conventional mortgage a path to homeownership. Because of this, you can qualify for an FHA loan with a lower credit score. These loans are available to borrowers with FICO credit scores as low as 500.

FHA loans still offer lower down payments: Even with a lower credit score, you can still qualify for a low down payment loan with an FHA mortgage. If your credit score is 500 to 579, you can qualify for an FHA loan that requires a minimum down payment equal to 10% of your home’s purchase price. If your credit score is 580 or higher, you can qualify for an FHA loan that requires a minimum down payment of 3.5% of your home’s purchase price. 

The cons of an FHA loan

Mandatory mortgage insurance: You will have to pay mortgage insurance when taking out an FHA loan. In most cases, these payments last the entire term of your loan. 

You'll pay both an upfront mortgage insurance premium and an annual mortgage insurance premium with FHA loans. Your upfront mortgage insurance payment is equal to a single payment of 1.75% of your base loan amount. Your annual mortgage insurance premium varies depending on your down payment amount, loan amount and your loan's term. This premium ranges from 0.15% to 0.75% of your loan amount. 

If you make a down payment of 10% or more, you can stop paying your annual mortgage insurance premium after 11 years. If you make a smaller down payment, you'll pay this annual fee for the life of your loan.

Home type limited: You can only use an FHA mortgage to purchase an investment property if you also agree to live in it on a full-time basis. Because of this, most real estate investors don’t apply for FHA loans.

Work with real estate and financial professionals to find out what's the right choice for you.