FHA vs. Conventional: Which Loan Puts the Most Cash in Your Pocket?
- clarka781
- 6 days ago
- 3 min read
We're tackling one of the biggest questions in home financing: What’s the real difference between an FHA and a Conventional loan?
For many homebuyers and investors, the choice between these two options comes down to more than just the interest rate. It's about your down payment, your credit, your debt, and, ultimately, the total cash you need to bring to the closing table.
I recently sat down with Willis Richardson to break down the features of each loan product. Here is our breakdown of what you need to know.
1. Credit Score: Flexibility vs. Preferred Strength
Feature | FHA Loan (Federal Housing Administration) | Conventional Loan (Fannie/Freddie) |
Minimum Score | Can go as low as 580 (with 3.5% down) | Generally requires a minimum of 620 |
Sweet Spot | 640-680 for the best terms | 680+ and preferably above 700 |
The Takeaway: If your credit score is in the mid-600s or lower, an FHA loan can often provide a much clearer path to approval, and even better rates compared to the higher rates you'd get conventionally with a lower score.
Pro Tip: Need a Credit Boost?
If you’re close to that sweet spot, don’t try to pay off everything at once! It can hurt your score. Talk to us first. We have tools that can analyze your credit report and give you a precise, action-oriented list of what to pay down to get the biggest point bump—often in a short period.
2. Debt-to-Income (DTI) Ratio
The DTI ratio is the percentage of your gross monthly income that goes toward paying your monthly debt obligations (including your new mortgage payment).
FHA Loans: More flexible, often allowing DTI ratios up to 57% (with compensating factors).
Conventional Loans: Typically capped lower, generally around 50% maximum.
The Takeaway: If you have a few higher monthly payments (like student loans or car payments), the FHA’s higher DTI allowance might allow you to qualify for a more expensive home than you could with a Conventional loan.
3. The Mortgage Insurance Impact: The Biggest Differentiator
This is the one factor that impacts your monthly payment the most and is where the two loans truly diverge. Mortgage insurance (MI) protects the lender from loss if a borrower defaults.
Feature | FHA Loan (MIP) | Conventional Loan (PMI) |
Upfront Fee | Yes: A one-time Upfront Mortgage Insurance Premium (UFMIP) of 1.75% is typically financed into the loan. | No: No upfront fee required. |
Duration of Monthly Fee | Life of the Loan (if you put less than 10% down). | Cancellable once you reach 20% equity (80% LTV). |
The Takeaway: While an FHA loan might offer a lower interest rate upfront, the lifetime mortgage insurance (MIP) can make the loan more expensive over a long-term hold. A Conventional loan's Private Mortgage Insurance (PMI) can be cancelled, making it a better choice for borrowers who plan to build equity or refinance down the road.
4. Down Payment: Myth Busting
The biggest myth we hear is: "I need 20% down to buy a home."
This is simply not true.
FHA: Minimum down payment is 3.5%. You can also ask for seller concessions to cover closing costs, making your out-of-pocket expense primarily the 3.5% down payment.
Conventional: Minimum down payment is as low as 3% for qualified first-time homebuyers and 5% for others. Even without 20% down, you are in the game!
The question is never, "Can I buy a home with less than 20% down?" The question is, "Which low-down-payment program is best for my unique financial scenario?"
Ready to Find Your Best Path to Homeownership?
Choosing between FHA and Conventional requires running the numbers on your specific income, debt, and credit score. Don't settle for a quote that's not tailored to you. As a broker, I can compare rates and terms from multiple lenders to ensure you are in the absolute best program.
Let's break down the math together and figure out which loan puts more cash in your pocket—both today and long-term.
Clark Alexander
Mortgage Loan Officer | NMLS #2484175
Pure Funding | Lafayette, CA
Start your secure online application here:
All loans subject to approval. Equal Housing Lender.
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