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FHA vs Conventional: Comparing the Most Popular Mortgage Loans

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When you’re ready to buy a home, choosing the right kind of mortgage is extremely important — you’ll be stuck with it for a long time, or until you refinance.

When it comes to mortgage options, conventional loans and FHA loans are the two most popular loan types among buyers. But which one is right for you?

In this primer, we’re taking a look at FHA vs conventional, as well as a look at VA loans for veterans. Each loan type has different pros, cons and credit requirements.

Conventional Loan

Simply put, a conventional loan is a loan that is not part of a government program. Conventional loans are financed by non-government institutions, like banks, credit unions and mortgage companies.

There are two types of conventional loans: conforming and non-conforming.

Conventional Conforming Loans

While conforming loans are not backed by the government, they have to conform to loan limits set by the government. In 2022, conforming loan limits must be $647,200 or less in most counties, or less than $970,800 in select high-cost counties. Loans above these amounts would be non-conforming loans.

To be eligible for a conforming loan, you will need:

  • A 620 credit score or higher
  • A maximum of 50% debt-to-income ratio (DTI)
  • At least 3% down
  • Two years of employment history

Generally speaking, conventional conforming loans have better interest rates, require low down payments, and have slightly more relaxed credit score requirements than non-conventional loans.

Note: You can buy a house with a credit score of 600, but your options for mortgages may be more limited. In general, lenders prefer to avoid risks, and having a strong credit score will help you secure a loan.

Non-conforming Loans

Non-conforming loans do not adhere to loan limits set by the federal government. Loan amounts and eligibility requirements for non-conforming loans are set by the individual lenders. Since the loan amount is high, a larger down payment and good credit are required.

Restrictions for Conventional Loans

There are no property restrictions that sellers need to be concerned about with conventional loans, including home condition. Prior to closing, the home will go through a general home inspection and the price can be negotiated down based on the findings, but there are no rules for specific standards that must be met.

However, lenders can deny loans for homes that aren’t safe or structurally secure, or are uninsurable.

FHA Loans

FHA loans are insured by the Federal Housing Administration. FHA loans offer low down payment options and lax credit scores, but require Private Mortgage Insurance (PMI) throughout the life of the loan if you make a down payment of less than 10%.

Additionally, FHA loans are only available for homes that pass FHA inspections.
A huge benefit of FHA loans is they offer borrowers the option to pay a reduced down payment.

FHA Loan Requirements

To be eligible for an FHA loan, you will need:

  • A credit score of 580 or above and a 3.5% down payment
  • A credit score of 500-579 and a 10% down payment
  • A maximum DTI ratio of 43%

While FHA loans are available for people with below average credit scores — between 500 and 579 — you will need to put 10% down. If your credit score is at least 580, you may be eligible for a 3.5% down payment.

Restrictions for FHA Loans

Unlike conventional loans, homes financed with an FHA loan must pass FHA appraisal. Some FHA home inspection requirements include:

  • No peeling paint
  • A roof that will last at least two years
  • No evidence of termites or wood-destroying organisms
  • A working heating and water systems
  • The property must be safe and have reasonable access
  • No loose wiring or exposed cables

FHA loans are not favored among sellers because of these requirements. Simple things that conventional buyers wouldn’t care about, like peeling paint, must be fixed to pass the FHA appraisal. Because of the extra requirements, FHA loans usually take longer to close.

However, if the house is in very good condition, sellers shouldn’t have much to worry about – plus, some areas will have more FHA buyers than conventional ones. Ask your realtor about what kind of buyers are frequent in your neighborhood so you can prepare you home for sale and protect against lender delays.

And if you’re a buyer, speak with your realtor about using an FHA loan and what kind of homes will qualify. Your realtor will be able to identify houses that are likely to pass FHA inspections (and sellers who are unwilling to make the fixes).

» MORE: How Much Are FHA Closing Costs?

VA Loans

Insured by the Department of Veteran Affairs, VA loans may be the best way to finance a home if the option is available to you. These loans are strictly for current servicemembers and veterans of the armed forces and their spouses.

The biggest benefits of the VA loan is that it doesn’t require a down payment and it doesn’t require PMI, no matter how little you put down.

VA Loan Requirements

To be eligible for a VA loan, you will need to meet any of these requirements:

  • Have served 90 consecutive days during wartime
  • Served 181 active service days during peace time
  • Have six years of creditable service in the National Guard
  • You’re the widow of a servicemember who died in service or died from disabilities related to service

Unlike conventional and FHA loans, VA credit requirements are set by individual, VA-approved lender.

Generally, though, most VA-approved lenders require:

  • A 620 credit score
  • A maximum DTI of 41%

VA loans do not have to conform to loan limits set by the federal government, so VA loans can be used to buy houses above the current cap of $647,200 in most counties.

VA Loan Restrictions

Homes that can be financed with VA loans must pass a VA appraisals that is very similar to an FHA appraisal. Some minimum requirements include:

  • No peeling paint
  • No termites or wood-destroying organisms
  • Working heating, water, and sanitation systems
  • Structural soundness
  • Safe access from a street or road

Essentially, the home must be safe, sound and sanitary, a requirement that often disqualifies foreclosures and short sales.

For sellers, your home may be disqualified if:

  • If fails to meeting one or more of the VA’s Minimum Property Requirements
  • There are any major structural, safety or sanitation issues with your home
  • There are mold, termites or other major system issues
  • Your property, if it’s not a standalone house, is not in a VA approved complex (check the list here) If an issue is uncovered during an inspection, it can be possible to make repairs prior to sale to bring the home up to VA standards, but in some cases, it’s not worth the effort. This is particularly true if the home was built a long time ago and is not up to code or if you know there are major issues you can’t afford or don’t want to fix.

» MORE: What You Need to Know About VA Non Allowable Fees

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