Conventional or FHA Loan: Weighing Your Options

Conventional and FHA loans are two primary mortgage loan options available to both first time home buyers as well as more experienced home purchasers.

Comparing Conventional and FHA Loans

Conventional and FHA loans are similar in that both loans require a minimum 3 percent down payment, both loans are typically 30-year fixed, and both loans require the buyer to get mortgage insurance, although only FHA loans require the first year to be prepaid at closing. Both require an appraisal.

Advantages of FHA Loans

The main drawbacks of FHA loans versus conventional loans is the required prepayment of the first year's mortgage insurance and the lower maximum loan requirements, but the benefits of FHA loans are many:

  • down payment can be gifted from relative or government agency

  • FHA loans are guaranteed by the government and typically have low interest rates

  • if your credit is not perfect, underwriters will accept explanations for credit issues

  • buyers with less-than-perfect credit can still obtain funding

  • buyers can obtain FHA loans two years after bankruptcy versus four years with conventional loans
Finding a Conventional or FHA Loan

Most mortgage lenders offer multiple loan products, so a single lender might be capable of offering you either a conventional or an FHA loan. However, you should shop around to make sure you are obtaining the best possible interest rate and the lowest fees.