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Short Summary
Main recommendation: Compare FHA loans and conventional loans before choosing a mortgage, since the right option depends on your credit score, debt-to-income ratio, down payment, and the property you want to buy. FHA loans are government-backed options that are easier to qualify for but carry long-lasting mortgage insurance, while conventional loans are the most common type and can avoid that cost with a 20 percent down payment.
Key Points
- FHA loans are backed by the Federal Housing Administration and are designed to make homeownership accessible to more people, with lower credit score and higher debt-to-income allowances than conventional loans.
- The FHA minimum credit score is 500, but lenders can set their own higher minimums, and conventional loans generally require at least 620, with a debt-to-income ratio usually no higher than 36 percent for conventional loans (FHA allows up to about 50 percent for those with a 580+ credit score).
- FHA mortgage insurance is a major cost: it lasts 11 years with a 10 percent or larger down payment, or for the life of the loan with a smaller down payment, and includes a 1.75 percent upfront premium usually financed into the loan.
- Conventional loans can allow a down payment as low as 3 percent, but private mortgage insurance applies until you reach 20 percent equity, and lenders must automatically cancel it at 78 percent of the original loan amount.
- FHA loans require an FHA appraisal checking basic safety and soundness, which can make some sellers hesitant, especially in hot markets.
Details Worth Noting
- Concrete instructions: Ask lenders directly for an FHA or conventional loan, since conventional loans are the default offer unless you specify otherwise. Get a home inspection, which the speaker says NerdWallet strongly recommends, separate from the lender-ordered appraisal. To remove conventional private mortgage insurance, either keep paying down the loan until 80 percent of the original amount remains and ask the lender to cancel, or request cancellation based on appreciated home value with an appraisal showing at least 20 percent equity. Consider refinancing later from an FHA loan into a conventional loan, or into another FHA loan through a streamlined refinance.
- FHA down payment depends on credit score: 10 percent minimum for scores of 500 to 579, and as low as 3.5 percent for scores of 580 or higher.
- FHA loan types include the standard 203(b) purchase loan, the 203(k) loan that finances renovations within one mortgage, Title I loans that can cover manufactured homes, construction-to-permanent loans for building a house, and energy efficient mortgages.
- Conventional loans with credit scores of 740 or higher may receive better terms and interest rates.
- Lenders must do a regular appraisal for both loan types to confirm the home is worth the purchase price.
Bottom Line
FHA loans open doors for buyers with lower credit or higher debt, but their long-term insurance costs and extra property requirements should be weighed against conventional options before committing.
