FHA Vs. Conventional Loans: A 2024 Comparison

When it comes to financing a home purchase, two popular options are FHA (Federal Housing Administration) loans and conventional loans. Both have their own considerations, making it essential for prospective homebuyers to understand the differences between them. 

FHA loans are backed by the Federal Housing Administration, making them accessible to borrowers with lower credit scores and smaller down payment capabilities, helping more people buy homes. Conventional loans, on the other hand, are not government-insured and often require higher credit scores and larger down payments.

The landscape of the housing market and lending practices has evolved over the years, impacting borrowers based on their ability to qualify for an FHA loan or a conventional mortgage. Let’s delve into the pros and cons of FHA vs. conventional mortgage options in the current market to help you make an informed decision.

FHA Loans

An FHA loan appeals to borrowers who may not qualify for conventional loans due to lower credit scores or limited down payment capabilities. These loans make it possible for buyers to purchase homes at great rates with low down payment options and flexible credit score requirements. 

The FHA will back loans for single-family homes, manufactured homes, and multifamily homes with up to four units. The property must be a primary residence, and at least one of the borrowers must start dwelling on the property within 60 days of closing. The property must also meet safety, security, and soundness requirements.

In addition to standard mortgages, other FHA loans include:

• 203 (k) loan: Financing for home rehabilitation projects 
• Cash-out refinance: A loan homeowners can use to refinance an existing mortgage at a higher amount to access cash 
• Streamline refinance: A simplified option for refinancing an existing FHA loan to one with a lower monthly payment 

Here are some key points to consider about qualifying for an FHA loan:

Minimum Down Payment

One of the significant advantages of an FHA mortgage is the lower down payment requirement. The lowest down payment for an FHA loan is 3.5%, making homeownership more accessible to a broader range of home buyers. To get that, you need a FICO score of at least 580. A rating below that requires 10% down. 

Mortgage Insurance

FHA loans require mortgage insurance premiums (MIP) to protect the lender in case the borrower defaults on the loan, regardless of the loan amount. This additional cost can impact the overall affordability of an FHA loan, especially over the long term.

Lending Limits

The FHA updates its lending limits annually, and the most up-to-date list is on the Department of Housing and Urban Development (HUD) website.

For 2024, the loan limit or maximum for a single-family home in 38 metropolitan statistical areas of Florida is $498,257. The micropolitan statistical area of Key West has the highest limit of $929,200. An Associates Home Loan agent can help you to verify the current amounts for your location.

Debt-to-Income Ratio 

Your debt-to-income (DTI) calculates how much of your net income you spend on debt payments, such as rent, credit cards, and other loans. The maximum DTI the FHA allows is 57%. As with credit score and down payment requirements, a lender could set stricter standards. 

FHA Credit Score Requirements in 2024

An FHA loan continues to be an attractive option for borrowers with lower credit scores. While conventional loans typically require a minimum credit score of 620 or higher, FHA loans may allow borrowers with credit scores as low as 580 to qualify. This flexibility makes FHA loans more accessible to individuals who may have experienced credit challenges in the past or are still in the process of building their credit history, making it easier to qualify for an FHA loan.

However, it’s important to note that specific lender requirements may vary. Our team can help you determine your eligibility.

Conventional Loans

Conventional loans are not insured by the government and are offered by private lenders. They are ideal for borrowers with strong credit scores and financial stability, so they’re harder to qualify for than an FHA loan.

Here’s what to know about conventional loans.

Credit Score Requirements

Conventional loans typically require higher credit scores than FHA loans. In 2024, borrowers may need a credit score of 620 or higher to qualify for a conventional loan, although some lenders may require even higher scores for a competitive interest rate. You must also have a clean credit history with no major issues like foreclosure or bankruptcy.

DTI Requirements

Conventional loans require a DTI of 36% or less.

Minimum Down Payment

Conventional loans often require a higher down payment compared to FHA loans. In 2024, borrowers typically need to put down at least 20% of the purchase price, depending on the lender’s requirements and the borrower’s financial profile, including the loan amount and type of home loan they are applying for. However, you may be able to put down less if you’re willing to pay private mortgage insurance. 

Private Mortgage Insurance (PMI)

Borrowers who put down less than 20% on a conventional loan may be required to pay private mortgage insurance (PMI) to protect the lender against default. This additional cost can increase the monthly mortgage payment and should be factored into the overall affordability of the loan.

FHA vs. Conventional Loans Comparison

When deciding between FHA loan and conventional loan options in 2024, consider the key factors, including the loan limit, down payment requirements, and eligibility criteria.

• Credit Profile: Borrowers with lower credit scores or limited credit history may find FHA loans more accessible, while those with excellent credit may benefit from the competitive rates and terms offered by conventional loans. 
• Down Payment: If you have limited funds for a down payment, an FHA loan with its lower down payment requirement may be a more suitable option. However, if you can afford a higher down payment, a conventional loan may offer more flexibility and potentially lower overall costs. 
• Mortgage Insurance: Consider the impact of mortgage insurance on your monthly payments and the total cost of the loan. FHA loans have upfront and annual mortgage insurance premiums, while conventional loans may require PMI until you reach a certain loan-to-value ratio. 

What’s Better, an FHA or a Conventional Loan?

The short answer: neither.

The choice between FHA and conventional loans depends on your individual financial situation, credit profile, home loan needs, and homeownership goals. It’s essential to compare the benefits and drawbacks of each loan type carefully and consult with a mortgage professional at The Associates Home Loan of Florida, Inc. to determine the best option for your specific needs. 

Qualify For a Loan Today With The Associates Home Loan of Florida, Inc. 

Let The Associates Home Loan of Florida, Inc.’s team guide you in selecting the right loan product for your needs. From nontraditional loans to commercial real estate investing to A-paper options, we have many options to help you get into that dream home or rental property.

Take the first step and find out what you qualify for today—apply online, and let us take care of the rest!