FHA loans allow you to get a mortgage and buy a home sooner, but they come at a cost. If you can qualify for a conventional mortgage instead, you may save thousands over the life of your loan.

FHA loans are government-backed mortgages designed to make home ownership more accessible by relaxing eligibility requirements—including allowing borrowers to buy a home with a down payment of just 3.5 percent.

So you would want to use an FHA loan whenever you can, right? Not exactly. Despite their advantages, there are circumstances in which you will be better off using a conventional mortgage. A “conventional” loan (also known as a “conforming” loan) is just a loan that meets the requirements and guidelines for its size  (the dollar amount) and for the financial situation of the borrower (their credit history and cash on hand). Let’s look at the pros and cons of both:

FHA loans are ideal for non-traditional borrowers

The advantages of FHA loans are so strong that qualifying for one could enable a person to buy a home, even though they would never be approved under a conventional loan.

Here are the reasons why:

Lower down payment requirement

Though conventional financing is now offering loans with down payments as low as 3 percent of the purchase price, those loans are typically income qualified. That is to say that they are typically available to lower income borrowers only.

But for most conventional loans, the standard minimum down payment is 5 percent. On FHA loans, the minimum down payment is 3.5 percent. That can lower your down payment requirement by $3,000 on a $200,000 home purchase.

Lower minimum cash to close

Both FHA and conventional loans allow some or all of the down payment on a purchase to come from a gift from a family member. However, unless the gift will cover fully 20 percent of the down payment, conventional loans require that the borrower contribute a minimum of 5 percent of the purchase price out of their own funds.

For FHA loans, the 3.5 percent down payment can come from a gift from an acceptable donor.

Relaxed credit standards

For conventional loans, a minimum credit score of 620 is typically required. On FHA loans however, the minimum is 580.

FHA loans are also more widely available for borrowers who have either filed for bankruptcy or foreclosure.

For example, on a conventional loan seven years must pass before you will be eligible for financing. But with FHA loans, only three years need to pass. If a borrower has filed for bankruptcy, at least four years must pass before applying for a conventional loan. Under FHA, only two years are required.

Lower closing costs

It’s not really that closing costs are lower on FHA loans, but rather that “interested parties”—like real estate agents, mortgage brokers, and sellers—can pay for the closing costs, at up to 6 percent of the new loan amount.

Under conventional financing, interested parties can contribute no more than 3 percent of the new loan amount, unless the down payment exceeds 10 percent of the property value. The net effect is less money out-of-pocket by the borrower under an FHA loan.

FHA loans are assumable

This doesn’t help a borrower qualify for the loan at the time of purchase, but it provides a major selling incentive when the borrower decides it is time to sell. This is a particularly important advantage in an environment of rising interest rates. If the going rate on mortgages is 6 percent, but you have a 4 percent loan on the property, the buyer can assume your 4 percent mortgage. That is an enormous incentive!

But in the interest of full disclosure, there are two disadvantages with assumptions that you need to be aware of.

The first is that in order for you, as the original borrower, to be released from the loan, the assuming party must be credit qualified. That is to say, that the new owners must be fully able to carry the loan without you acting as a guarantor.

The second disadvantage has do with the down payment. The new buyer will have to come up with the difference between the current mortgage balance and the agreed-upon sale price. If the house is worth $200,000, and the outstanding mortgage balance is $175,000, the buyers will have to put up the difference of $25,000. The high upfront requirement may offset the low interest rate on the loan.

Debt-to-income (DTI) ratio expanded with a cosigner

Both conventional and FHA loans accept the use of a cosigner to strengthen the mortgage application. However, conventional loans require that the occupying borrowers meet certain debt-to-income (DTI) ratios. FHA loans consider the financial strength of all parties on the loan, both occupying borrowers and non-occupying cosigners, under a single DTI. Cosigners will work much better with FHA loans. In many conventional situations, they won’t help at all.

The advantages of an FHA loan come at a significant cost. For borrowers who can qualify, a conventional loan will typically will cost much less than an FHA loan.

Consider the following:

No upfront mortgage insurance premium (UFMIP)

FHA loans require that an UFMIP premium equal to 1.35 percent of the base mortgage amount be added to the loan balance. On a $200,000 loan, this will add $2,700 to your loan amount, and you will pay it off over the term of the loan. Conventional loans do not require UFMIP, even where private mortgage insurance (PMI) is required.

Monthly mortgage insurance can be canceled

Both FHA and low down payment conventional loans require that you have private mortgage insurance (PMI). And both loan types require that it is paid monthly, as part of your house payment. On FHA loans the annual premium is equal to 0.85 percent of the base loan amount, which means that you will pay a premium of $1,700 per year – or about $142 per month – on a $200,000 loan.

PMI on conventional loans varies, due to your credit score, the loan type, and the size of your down payment, so there is no general rate. However, monthly PMI on a conventional loan can be canceled once the amount of the loan drops to 78 percent of the original purchase price of the property. On FHA loans, monthly PMI is required throughout the term of the loan, and cannot be canceled.

You may not need mortgage insurance at all

On FHA loans, PMI is required across the board. On conventional loans, it’s not required if you make a down payment equal to 20 percent or more of the property value.

Wider variety of loan programs

Conventional financing offers a variety of adjustable rate mortgages, as well as loans on a wider variety of properties. For example, with conventional loans, you can get financing on investment properties and second homes. FHA loans are restricted to owner occupied primary residences only.

More relaxed property requirements

FHA loans are fairly strict when it comes to property condition. They will often require certain repairs to be made prior to closing. If the repairs are significant, the seller may decide to back out of the deal. Conventional loans typically have less restrictive property requirements.

Easier condominium approval

FHA rules require that a condominium project be approved by FHA in order for a borrower to get an FHA loan to purchase it. Unfortunately, the list of approved projects is relatively short. With conventional loans, however, the lender only needs to certify that the condominium project meets certain industry standards, then a loan can be made in that project.

Even though both FHA loans and conventional loans provide the same product, the specifics as to how they do it are very different. In most cases, which loan you take will be determined by necessity. That is, which program type most closely fits your situation. For example, if cash to close is a problem, then you will most likely go with an FHA loan. But if you’re purchasing a condominium, it’s more likely than not that you’ll need a conventional loan.

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