FHA vs. conventional for first-time buyers

The two loans most first-time buyers compare are the FHA loan and the conventional loan. Neither is better for everyone. Which fits depends on your credit, your savings, how long you plan to stay and the home you want.

The short version

• FHA loans are insured by the Federal Housing Administration. They are often a good fit when your credit score is lower or your down payment is small.
• Conventional loans are not backed by a government agency. They tend to fit buyers with stronger credit, and the mortgage insurance can come off later.

Down payment and credit

FHA loans allow a down payment as low as 3.5% with a credit score of 580 or higher. With a lower score the minimum down payment is typically higher, and many lenders add their own score requirements. Some conventional programs allow as little as 3% down, though they usually look for a higher credit score than FHA, and the best terms generally go to buyers with stronger credit and larger down payments. Minimums change and vary by lender, so confirm with a loan officer.

Mortgage insurance

Both loans charge for mortgage insurance when the down payment is small, but they work differently.

• FHA charges an upfront premium, which is usually added to the loan, plus an annual premium paid monthly. On many FHA loans with a small down payment, the monthly premium lasts for the life of the loan unless you refinance. With a larger down payment it can end sooner.
• Conventional private mortgage insurance (PMI) is monthly, and you can generally ask to remove it once you reach about 20% equity. It ends automatically at 78% of the original value if you are current on payments. The cost depends on your credit score and down payment.

Other differences

• FHA loan limits vary by county. Conventional loans follow conforming loan limits, and larger loans are called jumbo loans.
• FHA requires the home to meet certain condition standards, and it can be used only for a primary residence.
• Sellers and agents sometimes view conventional offers more favorably, but that depends on the market and the situation.

Which is right for you?

A good approach is to compare the full monthly payment for each loan, including mortgage insurance, taxes and insurance, and to see how long each would take to cost less. A loan officer can price both with your real numbers. Start by checking your debt-to-income ratio, then get pre-qualified. There is no obligation, and no credit check for the first conversation.